Beyond Dependency in Puerto Rico: Exploring Social and Solidarity Industrial Policy as an Alternative for the Global South

1. Introduction

Puerto Rico has endured a series of consecutive crises: a government bankruptcy in 2016 leading to a US-imposed fiscal control board and severe austerity measures in 2017, two devastating hurricanes the same year, swarms of earthquakes, and the 2020 pandemic (Quiñones-Pérez and Seda-Irizarry 2020: 95). Another major hurricane impacted the island in 2022. These events have compounded the island’s economic challenges. While the cost of living in Puerto Rico matches the US average, the mean annual wage is approximately 50 percent lower (Instituto de Estadísticas de Puerto Rico 2022: 1). The island faces a high poverty rate of 42.7 percent and an alarming child poverty rate of 61.6 percent (US Census Bureau 2024). Labor participation has remained under 50 percent for five decades (Junta de Planificación de Puerto Rico 2023), with many residents relying on federal assistance and the informal economy (US Census Bureau 2024).

Mainstream economic perspectives link Puerto Rico’s challenges to market distortions generated by the island’s status as a US territory, particularly the application of the US minimum wage and welfare programs since the 1970s. This view is encapsulated in the 2015 Krueger report, authored by former International Monetary Fund (IMF) economists Anne O. Krueger, Ranjit Teja, and Andrew Wolfe. Although not an official IMF publication, the authors’ association with the IMF lent it significant weight, and the fiscal control board viewed it as an unbiased, independent assessment. The report argues that the US minimum wage and welfare programs hamper Puerto Rico’s economic growth by disincentivizing labor demand and supply. It recommends lowering employer costs, improving business conditions, and fostering investor confidence through fiscal conservatism (Krueger, Teja, and Wolfe 2015: 7). This report became the blueprint for the fiscal control board’s neoliberal policies in subsequent years.

From a progressive perspective, Puerto Rico’s economic issues are deeply rooted in its colonial history, and understood as an institutional crisis marked by inadequate government capacity and crony capitalism (Fuentes-Ramírez 2024: 7; Quiñones-Pérez and Seda-Irizarry 2020: 95). The proposed solution involves transforming the government into a democratic developmental state capable of implementing an industrial policy program (Aponte-García and Orengo-Serra 2020: 33; Fuentes-Ramírez 2020: 24).

This article has four primary objectives: first, it analyzes Puerto Rico’s economic history under US rule and critically examines mainstream interpretations; second, it highlights the displacement affecting Puerto Ricans due to the dependent growth model; third, it studies the characteristics and roles of native Puerto Rican capitalists and their implications for an industrial policy program; and finally, it introduces the concept of Social and Solidarity Industrial Policy as a framework for sustainable economic development in Puerto Rico and other Global South economies.

2. The Rise of Puerto Rico’s Dependent Growth Model

After the invasion in 1898, Puerto Rico was morphed into an economy dependent on US capital and imports (Fuentes-Ramírez 2020: 21). By 1940, Puerto Rico was highly dependent on food imports from the United States, and most agricultural land was controlled by the US sugar industry (Ayala and Bernabe 2007: 187). The legacy of the plantation economic system and the 1940s industrial context has left enduring structural issues that continue to impact the island’s economy. A thorough discussion of these historical contexts is beyond the scope of this article and has already been discussed in the literature (Quintero Rivera 1986; Dietz 2002; Fuentes-Ramírez 2020). Therefore, this article focuses on the aspects most relevant to the current discussion.

In 1941, Rexford Tugwell, a New Deal institutionalist economist, was appointed governor of Puerto Rico. He aimed to diversify agriculture, end US sugar industry dominance, develop infrastructure, and foster import substitution through state-owned factories. Tugwell’s plans were fiercely attacked by Puerto Rico’s native capitalists (Ayala and Bernabe 2007: 189). The wealthy Puerto Rican elite was content with its position as a comprador or lumpen-bourgeoisie, subordinate to the interests of US corporations (Fuentes-Ramírez 2020: 21). Tugwell was eventually replaced in 1946, and his development vision for Puerto Rico was abandoned. It is worth noting that when Tugwell had arrived in Puerto Rico, the island was still recovering from the devastation of two major hurricanes (in 1928 and 1932) and the Great Depression, which compounded the structural problems of the colonial economy. His memoirs on his experience in Puerto Rico were titled “The Stricken Land” (Tugwell 1947). As is evident throughout this article, commonalities abound relative to the present situation.

In 1947, Puerto Rico launched “Operation Bootstrap,” offering tax exemptions to attract US manufacturing. This strategy focused solely on job creation without fostering local economic linkages. Although the island industrialized with an average annual growth rate of 6 percent from 1950 to 1970, manufacturing jobs did not offset the decline in agriculture, leading to high unemployment and poverty rates (Ayala and Bernabe 2007: 195; Fuentes-Ramírez 2020: 21). To address unemployment, the government promoted outmigration, with over 500,000 Puerto Ricans migrating to the United States between 1950 and 1965. Despite this, unemployment remained above 10 percent, and labor participation fell from 55 percent in 1950 to 45 percent in 1959 (Ayala and Bernabe 2007: 195; Junta de Planificación de Puerto Rico 2023). By 1970, 65 percent of the population lived below the poverty line (US Census Bureau 1973).

In this context, social movements denouncing mass unemployment gained momentum. Labor militancy heightened while “left-patriotic” and Marxist political parties and armed groups were established (Ayala and Bernabe 2007: 281). The 1973 oil crisis further exacerbated the situation, marking the first year of negative growth since Operation Bootstrap’s inception (Fuentes-Ramírez 2020: 21). The US government was wary of the possibility of its military bases in Puerto Rico finding themselves isolated in a hostile environment (Ayala and Bernabe 2007: 187–89).

It was also likely important for the United States that the Caribbean economy under their rule perform better than Cuba, the Caribbean economy under Soviet influence a mere 500 miles away. It is therefore not surprising that the United States sought to provide a lifeline to the Puerto Rican economy during the 1970s. The United States expanded federal welfare programs, included Puerto Rico in the federal minimum wage, and introduced Section 936 in the tax code, creating a tax-free environment for US corporations. Despite an average annual growth rate of 3 percent between 1983 and 1996, most of the working-age population remained outside the formal economy (Dietz 2002: 317–20; Fuentes-Ramírez 2020: 23).

Among the most significant aspects of the 936-stage for the current discussion is that it underscores a critical historical insight. By the end of the 1960s, the island’s development strategy heightened mass unemployment to such a degree that, even with the countervailing effect of outmigration, formal labor participation had plummeted. Of even greater concern for the US government, the situation was pushing the most radical workers towards revolutionary struggle. What contemporary mainstream analyses often cite as the root causes of Puerto Rico’s low labor participation (i.e., being included in federal welfare programs and the federal minimum wage) were in fact among the solutions put forth by the United States to compensate for the failures of the dependent growth model. In short, formal labor participation in Puerto Rico plummeted prior to being included in federal welfare programs and the federal minimum wage. Evidently, it would be difficult to argue these were the causes. This glaring oversight in the mainstream account highlights the importance of incorporating historical analysis into economic analysis.

3. The Stricken Economy: Depression, Austerity, Hurricanes, Earthquakes, the Pandemic, and Displacement

Section 936 was repealed in 1996, with a 10-year phase-out period until 2006, after attacks from fiscal conservatives concerned about its erosion of the US tax base (Ayala and Bernabe 2007: 269). Its repeal sparked a 12-year economic depression in Puerto Rico from 2006 to 2018, marked by an average annual growth rate of −2 percent in real Gross National Income (GNI), a cumulative contraction of −22 percent in real GNI, and a 20 percent decrease in employment (Junta de Planificación de Puerto Rico 2013, 2023). The resulting lower revenues precipitated a debt crisis, leading the US Congress to establish a fiscal control board to oversee Puerto Rico’s finances. In 2017, the island was devastated by Hurricane María, coinciding with the start of the fiscal control board’s austerity program.

Austerity measures further weakened the Puerto Rican government’s capacity to manage disaster relief funds. Puerto Rico is receiving substantial federal aid, totaling approximately $110 billion for COVID-19 assistance and reconstruction efforts related to hurricanes and earthquakes, anticipated to be expended by the 2030s (Financial Oversight and Management Board for Puerto Rico 2020). This amount exceeds 150 percent of the island’s annual GNI.

The injection of disaster aid led to moderate real growth in GNI for the first time in over a decade, with employment growing at an average annual rate of 3 percent since 2018 (Junta de Planificación de Puerto Rico 2023). However, employment growth has not been sufficient relative to the working-age population. Outmigration, a constant factor, has accelerated during ongoing disaster relief efforts. Puerto Rico faces a severe housing crisis, characterized by a lack of affordable housing, rising prices, increased foreclosures, and evictions, and over 300,000 homes damaged by storms since 2017 (Santiago-Bartolomei et al. 2022: 3). High housing prices and rents result from speculation by investors on platforms like Airbnb, the influx of wealthy US investors, and increased construction costs due to federal disaster relief funds, contributing to a speculative real estate market and exacerbating the housing affordability crisis. These housing issues intensify the broader economic challenges resulting from the dependent growth model, which has failed to create sustainable economic development and left Puerto Rico vulnerable to external pressures and crises.

In 2012, Act 22 (now Act 60) was passed to incentivize wealthy US individuals to move to Puerto Rico (Quiñones-Pérez and Seda-Irizarry 2020: 91). This act includes a 100 percent tax exemption on income taxes for individual investors relocating from the United States. As of April 2022, 4,856 US individuals had been granted this tax exemption (Departamento de Desarrollo Económico y Comercio del Gobierno de Puerto Rico 2022). Many have hoarded properties, evicted households, and converted housing units into short-term rentals, particularly on Airbnb (Santiago-Bartolomei et al. 2022: 3). Although not the sole cause, these settler colonial dynamics are significant factors in the housing crisis, gentrification, and displacement (Santiago-Bartolomei et al. 2022: 18; Rosa, Rodríguez Del Valle, and Cotté Morales 2023).

Historically, US investors preferred hiring local Puerto Ricans to manage their companies rather than moving to the island themselves (González Díaz 1991). However, the recent relocation of US investors to Puerto Rico represents a shift in colonial dynamics, with the local population feeling increasingly displaced and less likely to return after migrating to the United States. In 2000, at the height of the dependent growth model, 53 percent (3.8 million people) of the Puerto Rican population lived on the island, while 47 percent (3.4 million people) lived in the United States (US Census Bureau 2000). By 2020, 64 percent (5.6 million) of Puerto Ricans lived in the United States, with only 36 percent (3.1 million) remaining on the island (US Census Bureau 2020). The influx of wealthy US individuals suggests that Puerto Rican colonialism may be entering a new stage of plunder. While the twentieth century was characterized by the exploitation of Puerto Rico’s land and people by US corporations, the twenty-first century may be marked by the expulsion of Puerto Ricans from their ancestral lands. The census data indicate this process is well under way.

4. Industrial policy with the Puerto Rican elites?

With a few exceptions related to firms seeking to elude taxes, being a US territory implies most US corporations operating on the island are typically not considered by the Puerto Rican government as “foreign” for official purposes. Nevertheless, stakeholders ranging from Puerto Rican mainstream politicians to radical social movements, in practice distinguish between “native” Puerto Rican firms and US firms. What stakeholders refer to when they speak of “native” firms is to businesses that are owned and operated by residents of Puerto Rico. The crucial distinction lies in profit repatriation and economic linkages. US firms typically repatriate profits back to the US mainland and have few linkages with “native” firms, leading to significant economic leakage and limiting local development. For progressive economists, an industrial policy program is required to strengthen “native” firms and move beyond the dependent growth model.

Although Puerto Rico’s colonial conditions limit its ability to use traditional tariff-based policies, these are not the only components of industrial policy agendas. As Chang (2003: 9) has noted, industrial policy programs are usually the strategic coordination of a wide range of complementary industrial, technological, and trade policies. Previous work by Dietz (2003) has identified and discussed the potential development policies that are feasible for Puerto Rico within its colonial status. For example, Dietz (2003) suggests the government could design a comprehensive set of subsidies with key development objectives that leverage geographical and cultural advantages.

As mentioned previously, progressive economists in Puerto Rico have generally aligned on the importance of improving the state’s institutional capacity to build a democratic developmental state (e.g., Aponte-García and Orengo-Serra 2020; Fuentes-Ramírez 2024; Quiñones-Pérez and Seda-Irizarry 2020). According to this perspective, such a state should pursue import substitution to lessen the island’s food import dependency, foster export promotion, and engage strategically in global value chains. It is important to clarify that the proposed export promotion strategy is fundamentally different from the historical enclave dynamic of Operation Bootstrap. Instead of using Puerto Rico as an export platform for foreign capital, the focus is on promoting the exports of native businesses. However, an industrial policy requires a significant degree of collaboration with private capital.

Andreoni and Chang (2019: 20) note that the industrial policy literature has acknowledged that “intermediate classes” with conflicting interests and power may make implementation difficult. Nevertheless, they assert that “this does not mean that a country is bound by its history or lack of an industrialist class” and new political coalitions can be built to implement industrial policy (Andreoni and Chang 2019: 20).

While the Puerto Rican government has not pursued an industrial policy program, it has identified several industrial sectors it considers strategic, including aerospace, bioscience, agroindustry, information technology, tourism, and other emerging sectors. US firms in sectors like bioscience and aerospace are already operating on the island. However, the absence of linkages between these US firms and the local economy has limited their impact. As discussed, this issue has been persistent since the era of Operation Bootstrap, where the enclave nature of production prevented the benefits from permeating the local economy.

The question of what type of political coalition could be built in Puerto Rico has yet to be addressed. The Puerto Rico Community Survey is useful for providing a snapshot of Puerto Rico’s wealthiest—its richest 0.1 percent. The latest 2022 data suggest most of these individuals (57 percent) occupy C-suite positions in US firms, while only 30 percent are entrepreneurs owning their businesses. Around 10 percent are state officials, highlighting the close ties between Puerto Rico’s affluent class and the main political parties and underscoring the interconnectedness of economic and political power on the island (United States Census Bureau 2024). Also, it is significant that most of Puerto Rico’s elites are not in fact capitalists, but rather managers employed by US capital.

For the segment of Puerto Rican elites that are capitalists, the vast majority are commercial capitalists with direct links to US capital or the healthcare sector. Among Puerto Rico’s top 100 local firms in 2020 (measured by gross income), 26 percent were related to trade of US goods (wholesale and retail), 22 percent were health insurance companies, and 16 percent were private hospitals or providing other health services (Caribbean Business 2020). Within the 26 percent related to trade, the majority were related to US food imports. The hurricanes and the pandemic revealed the risks that stem from the island importing 85 percent of its food consumption (Orengo-Serra and Sanchez-Jauregui 2020: 15). Shipping traffic into Puerto Rico dropped off dramatically after the hurricane and struggled to recover for several weeks (Kim and Bui 2019: 4). Similarly, during the COVID-19 pandemic shipping traffic into the island dropped, as it did in many parts of the world. If imports were to cease because of an emergency or crisis, within one to two weeks Puerto Rico would be at risk of severe food supply depletion and potential malnutrition (Marrero et al. 2022).

Regarding those Puerto Rican capitalists who have gravitated toward the health sector, this mostly stems from the extensive privatization of the public health system in the 1990s (Ayala and Bernabe 2007: 292). The privatization process resulted in high profits for native capitalists at the expense of the healthcare system’s integrity. The past decades have been characterized by steady deterioration of the health system and its accessibility. Emphasizing the health sector is crucial because improving the health of Puerto Ricans is fundamental to any comprehensive industrial policy. A health system dominated by rent-seeking capitalists undermines public health, which in turn affects labor productivity and overall economic stability. Thus, reclaiming the health sector from private profiteers is essential for sustainable development and social well-being. As highlighted in a recent Washington Post report with its poignant title, “More people are dying in Puerto Rico as its healthcare system crumbles” (Sosa Pascual et al. 2023).

Two recent events were useful for observing the positioning of native capital in economic policy discussions: the Puerto Rico Minimum Wage Act (Act 47-2021) and the Labor Reform Act 41-2022. In both cases, native capital was extremely proactive and coordinated to fiercely fight the possibility of a modest wage increase and a modest expansion of worker benefits (Periódico El Nuevo Día 2021; Periódico Metro 2022).

What does this all imply for a potential coalition supporting an industrial policy program? Let us consider an industrial policy tailored to Puerto Rico’s structural problems, as discussed throughout this article. Industrial policy on the island should focus on food production as a critical sector for import substitution. Strengthening climate resilience through food sovereignty is vital given the lessons from past disasters, as discussed above. Local food brands would also have potential for export promotion, because of the size of the Puerto Rican diaspora. Yet, this strategy would clash with the interests of the powerful local elites that profit from the existing dependence on US food imports. Similarly, if universal healthcare is proposed as a system complementary to an industrial policy program, to improve the health and productivity of the working class, it would clash with another of the most powerful sectors of the local elites. If the industrial policy were to seek ecologically sustainable practices and living wages for workers, it would likely face opposition from local elites, given their aggressive campaigns even against modest proposals.

In other words, the most suitable economic development strategies for Puerto Rico are precisely those that local elites would sabotage. What type of political coalition would be more likely to develop an industrial policy that is suitable for the island?

5. Toward a Social and Solidarity Industrial Policy

Puerto Rico has a relatively vibrant worker cooperative movement. Collazo (2018: 304–35) provides a useful synthesis of studies on Puerto Rican cooperatives and highlights examples of how they have had successful experiences in a wide range of industrial sectors. It is estimated that 82 worker cooperatives are operating in Puerto Rico (Liga de Cooperativas de Puerto Rico 2021; Department of State, Government of Puerto Rico 2024). To put these figures in perspective, as of 2021 there were 555 worker cooperatives in the United States, or roughly 2 worker cooperatives per every million inhabitants (Democracy at Work Institute 2022: 1). And 82 worker cooperatives in Puerto Rico are equal to roughly 26 worker cooperatives per every million inhabitants.

Worker cooperatives are particularly relevant for Puerto Rico given their potential to formalize informal economic activities. After analyzing experiences of worker cooperatives across the Global South, the International Labor Organization (ILO) has concluded that they are instrumental in providing decent employment opportunities and improving living and working conditions in the informal economy, in a process that also facilitates the transition to formality (ILO 2016). The dependent growth model in Puerto Rico has pushed most of the working class out of the formal economy and into the precarious instability of informal petty commodity production or the informal service economy. With formalization, workers gain access to training programs, financial services, and subsidies. Moreover, with formalization, worker cooperatives provide greater stability for workers’ incomes and employment.

The ILO (2022) also points out that, beyond worker cooperatives, in general the Social and Solidarity Economy (SSE) is a good vehicle for formalizing the informal economy and for sustainable economic development. Rosado-Rodríguez and Reyes-Núñez (2021: 30–32) note that the concepts of social economy, solidarity economy, and social and solidarity economy have all been used somewhat differently in Europe and Latin America over the past decades. In Puerto Rico, SSE generally refers to firms or initiatives that frame their work according to principles related to ecological sustainability, gender equity, participation or direct democracy, and the supremacy of community well-being and cooperation over private profit and competition. In addition to a long history of worker cooperativism, Puerto Rico has a wide range of projects associated with the SSE. The Social and Solidarity Economy Network in Puerto Rico has organized two “Encounters” (2019 and 2020), connecting the diverse economic projects on the island that share SSE principles.

Although worker cooperatives and SSE projects serve as inspiring examples, they remain relatively rare in the broader economic context of the island. Despite their noteworthy presence compared to the United States, their numbers are insufficient to significantly shift the pattern of dependent growth and economic displacement. Nevertheless, considering the cumbersome institutional hurdles involved in establishing such firms on the island and that the state does little to promote or support them, the fact that this small but vibrant SSE has developed organically should not be understated. If this is happening organically with bureaucratic state hurdles, what could be accomplished with state support?

In contrast with the case of local elites, a political coalition between the state and the communities and workers of the SSE seems much more likely to agree on an industrial policy agenda with focus on food sovereignty, ecological sustainability, living wages, and establishing health and education as universal rights. Recent political shifts on the island suggest there may be space for such a coalition. The two major political parties have suffered a consistent loss of credibility and support. According to the Puerto Rican Elections Commission, from 2000 to 2020, the combined votes of their candidates for governor plummeted from 95 percent to 65 percent. It is also worth noting that voter turnout has also plummeted from 80 percent to 55 percent. In the 2024 elections, for the first time in Puerto Rico’s history, progressive parties and social movements have organized a single political alliance, called “Alianza País,” to contest against the two major parties. While this alliance may not win the 2024 elections, it is clear the political landscape in the island is changing. A “social and solidarity industrial policy” could become a vital component of the proposals put forward by the progressive alliance that is growing on the island.

Nevertheless, there are a variety of challenges that would obstruct the implementation of such an industrial policy. Given the fiscal control board’s ideological bent throughout its existence, it is likely they will hinder any significant investment toward a social and solidarity industrial policy program. While it is unclear when the fiscal control board will cease operations, it is nonetheless a temporary institution that was established as part of Puerto Rico’s debt restructuring. In other words, this hurdle will eventually be resolved.

On the other hand, it is likely that worker cooperatives and SSE projects may not be the appropriate institution for every aspect within an industrial policy program. Some production could be undertaken by small businesses, while initiatives that require large investments can be initiated by state firms, as Tugwell had envisioned. These state firms could still be administered in a democratic fashion by their workers; or be run with active oversight and input by citizens or communities.

In sum, the importance of industrial policy has been well documented and highlights the value of strategic state intervention to foster economic development in the Global South. Similarly, there is a growing literature on the potential of SSE for promoting sustainability and well-being in the Global South. By combining and integrating SSE principles into the industrial policy framework, this proposal extends these individual arguments. In other words, the state can make SSE the centerpiece of its industrial policy agenda. This approach is ideal to build a resilient, inclusive, and sustainable economy for Puerto Rico, while addressing both historical challenges and contemporary needs.

6. Concluding Remarks

This article argues that Puerto Rico should design and implement a Social and Solidarity Industrial Policy, that is, an industrial policy that prioritizes the strategic coordination of worker cooperatives, democratic state enterprises, and SSE projects as the main drivers of economic development. This presents a more viable long-term strategy for Puerto Rico’s economic development than relying on collaborations with native business elites. However, Puerto Rico’s two main political parties are unlikely to pursue such an industrial policy, given their close ties to said elites. Yet, the dwindling support of the two major parties suggests the political landscape of the island could shift considerably over the following decades. A political coalition championing a social and solidarity industrial policy would also mark a pivotal shift in the island’s approach to economic development. Puerto Rico is most certainly not the only developing economy in the Global South where native capitalists or elites are more likely to obstruct, rather than support, a good industrial policy program. On the contrary, this is most likely the norm. Thus, while evaluating each situation on its own merits remains crucial, opting for a Social and Solidarity Industrial Policy may offer a more strategic approach than attempting cooperation with local elites for many nations in the Global South.

Finally, an economic development agenda focused on having democratic state firms, worker cooperatives, and SSE projects play a larger and more decisive role in the economy, is intrinsically an anti-capitalist project. However, as any transformative project that grows in the interstices of capitalism, worker cooperatives and other SSE projects are generally more likely to see their transformative character eroded by capitalism than they are to contribute to the erosion of capitalism. Nevertheless, with systematic and institutional support from the state, worker cooperatives and other SSE projects could potentially lay the groundwork for a postcapitalist future (Fuentes-Ramírez 2014: 136–40).

A Social and Solidarity Industrial Policy is perhaps not the sole but arguably one of the most strategic paths to achieve long-term economic development in Puerto Rico. Given the commonalities in imperialist and colonial histories, it could potentially be the most strategic route in many parts of the Global South as well.