The authors review Puerto Rico's economic history and compare observed economic indicators following the storms to counterfactual estimates to assess the real net impacts of the 2017 hurricanes. This analysis provides the context for the recovery plan for rebuilding a sustainable and healthy economic sector and whole of Puerto Rico.

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Challenges and Opportunities for the Puerto Rico Economy

A Review of Evidence and Options Following Hurricanes Irma and Maria in 2017

by Craig A. Bond, Aaron Strong, Troy D. Smith, Megan Andrew, John S. Crown, Kathryn A. Edwards, Gabriella C. Gonzalez, Italo A. Gutierrez, Lauren Kendrick, Jill E. Luoto, et al.

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Research Questions

  1. What are the historical and current challenges to economic development in Puerto Rico?
  2. How has Puerto Rico's unique status as a territory of the United States presented both opportunities and challenges over a complicated economic and policy landscape?
  3. What were the main impediments to Puerto Rico's economic growth before the storms?
  4. How extensive was the damage to the economy following Hurricanes Irma and Maria?
  5. What principles/guidelines should be used to steer investments with the objective of long-term, sustainable growth of Puerto Rico's economy?
  6. What specific courses of action might encourage economic growth during and after the recovery effort?

Recovery of the Puerto Rico economy in the aftermath of Hurricanes Irma and Maria means not only rebuilding the public and private infrastructure, supply chains, human capital, and other contributors to economic output but also reversing negative economic trends that existed and presented major challenges to growth even before the storms hit.

In their report, the authors explain the history of economic development and policy in Puerto Rico and discuss the state of the prestorm economy, including key economic challenges. They use the historical data on overall economic activity (unrelated to the hurricanes) to construct a counterfactual to assess the net causal effect of Hurricanes Irma and Maria on Puerto Rico's economy. The counterfactual examines what would have happened to employment, labor, population, and tourism, as well as the government of Puerto Rico's fiscal position, had the hurricanes not occurred. Observed economic indicators following the storms are then compared to this counterfactual to estimate the real net economic consequences of the hurricanes, including overall damage from the storms and the effect of the recovery effort.

The analysis provides considerable detail on the conditions in Puerto Rico before and after the 2017 hurricane season so that decisionmakers can adopt better policies in rebuilding a sustainable and healthy economic sector and, more broadly, the whole of Puerto Rico. The authors recommend a set of principles based on economic theory and provide courses of action included in the recovery plan compiled from their findings about prestorm conditions and trends and the input/observations of on-the-ground partners and stakeholders in the recovery effort.

Key Findings

Long-term stressors before the storms added to the shock Hurricanes Irma and Maria delivered to Puerto Rico's economy

  • Puerto Rico has experienced negative economic growth and associated outmigration of labor due to a variety of factors since the phaseout of Section 936 manufacturing tax advantages in 2006.
  • Outmigration of capital, labor-force participation, and public debt are other long-term challenges with multiple root causes.
  • Cost of doing business, tax structure, the Jones Act, labor policies, and federal entitlement programs all have impeded Puerto Rico's economic growth.

Short-term impact of the hurricanes to economic activity was severe, and investment objectives should be steered toward long-term, sustainable growth

  • A large informal economy exists in Puerto Rico, which distorts the labor market and depresses property tax revenue, making government spending, relative to tax revenues, unsustainable.
  • Areas of special importance to the Puerto Rico economy, and the recovery effort, are tourism, trade and transportation, agriculture, manufacturing, fisheries and the ocean economy, and the nonprofit sector.
  • Investments related to strategic initiatives should be targeted to areas that support growth across multiple sectors and contribute to the reversal of economic contraction experienced over the past decade.

Recommendations

  • Ensure that specific policy changes overlap with and support principles for public investment for achieving long-term, sustainable economic growth.
  • Increase the attractiveness of doing business in Puerto Rico by lowering the (government-imposed) financial and nonfinancial costs of doing business and stemming the flow of outmigration.
  • Increase the formal labor-force participation rate by reforming labor market policies, removing disincentives for formal work, and providing incentives for workforce training.
  • Broaden the tax base and increase fiscal resiliency by flattening the tax structure in Puerto Rico and lowering dependence on particular tax exemptions.
  • Increase fiscal discipline to ensure a sustainable and rightsized public sector.
  • Invest primarily in infrastructure, including electricity, roads, bridges, and other transportation assets, communications, and water systems.
  • Invest in data gathering and information products to support better public and private decisionmaking.
  • Pursue investments that create economic diversification and add resiliency to the real economy and the fiscal position of the government.
  • Target investments to projects with the potential to support a large employment base, inspire entrepreneurial activity and innovation, contribute to relatively more regional economic supply-chain linkages, and promote visionary sustainable development goals. Development of tourism around the ocean economy is an example of one such idea.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    Brief History of Economic Development in Puerto Rico

  • Chapter Three

    Detailed Economic Prestorm Conditions and Trends in Puerto Rico

  • Chapter Four

    Challenges to Economic Development in Puerto Rico

  • Chapter Five

    Methodology for Economic Damage Assessment Following Hurricanes Irma and Maria

  • Chapter Six

    Economic Damage Assessment Following Hurricanes Irma and Maria

  • Chapter Seven

    A Set of Principles for Public Investment Consistent with Economic Growth in Puerto Rico

  • Chapter Eight

    Potential Courses of Action for Economic Development in Puerto Rico Following Hurricanes Irma and Maria

  • Chapter Nine

    Conclusions

  • Appendix A

    Detailed Courses of Action

  • Appendix B

    Notes on Electricity Deregulation and Privatization

  • Appendix C

    Supplemental Information on the Jones Act

  • Appendix D

    Case Studies of Economic Growth

  • Appendix E

    Government Promotion of Entrepreneurship

  • Appendix F

    Recovery Spending and Impacts

Research conducted by

This research was sponsored by the Federal Emergency Management Agency and conducted within the Strategy, Policy and Operations Program of the Homeland Security Operational Analysis Center.

This report is part of the RAND Corporation Research report series. RAND reports present research findings and objective analysis that address the challenges facing the public and private sectors. All RAND reports undergo rigorous peer review to ensure high standards for research quality and objectivity.

The RAND Corporation is a nonprofit institution that helps improve policy and decisionmaking through research and analysis. RAND's publications do not necessarily reflect the opinions of its research clients and sponsors.