PR Econ Lopez, Aide and Thomlinson (2001)

PR Econ

Lopez, Aide and Thomlinson (2001) discuss how the shift towards urbanization and away from an agriculture-driven economy has affected Puerto Rico. The authors note that in the 1930s, 43% of the island's gross national product came from agricultural products. This has shifted such that by 1996 that figure was 1.2%. This is in line with most urban, developed economies, but to an extent there was no major industrialization of Puerto Rico. The territory has a far lower GDP per capita than any U.S. state (CIA World Factbook, 2013). In recent years, Puerto Rico has experienced a shrinking economy and it has a high level of unemployment.

Puerto Rico once competed on the basis of two things -- its comparative advantage in the production of tropical agricultural products and its preferential access to the U.S. market. The island became a major seller of sugar to the U.S. The expectation would have been that this would increase after the fall of Cuba to the Communists cut that market off from the U.S. However, sugar has declined in prominence over time.

Puerto Rico has increasingly turned to tourism and the service economy as a means to spurring its economy. As a result, the island is exposed to the business cycle in the United States. Puerto Rican products generally find their way to the U.S., and the island also receives remittances from family members living in the U.S. This high level of exposure to the American business cycle -- tourism declines in recession -- has come about with the structural changes in the Puerto Rican economy. Where sugar is a commodity product for which demand does not decline strongly in recession, the multiplier on tourism related to the state of the U.S. economy is much greater.

Compounding the issues for Puerto Rico would be its political status. The island is a commonwealth, an unorganized territory within the U.S. (CIA World Factbook, 2013). The island has its own government, but the head of state remains the President of the United States. The local government has only limited control over the island's macroeconomic conditions. For example, the island does not have its own currency, and therefore its monetary policy is the responsibility of the U.S. central bank. This is important, because the central bank does not base its policy on the needs of Puerto Rico.

To some extent, the local government controls fiscal policy. The current budgetary situation for Puerto Rico is generally poor, with the government facing persistent deficits, which is not normally good for any territory that cannot borrow in a currency it controls.

In recent years, the country has seen its real GDP decline by 5.8% in 2010, 3.7% in 2009 and 2.8% in 2008 (CIA World Factbook, 2013). These declines in real terms are matched by similar nominal declines. The latest inflation figures for Puerto Rico are a gain of 1.7% in February, 2013 (Trading Economics, 2013). With inflation, nominal GDP would have declined faster than the real GDP.