The Federal Reserve Bank of New York today released Trends and Developments in the Economy of Puerto Rico—the latest article in its series Current Issues in Economics and Finance.

Authors Jason Bram, Francisco Martínez and Charles Steindel argue that a contraction in Puerto Rico’s economy over the past two years and a continuing income gap with the U.S. mainland point to an uncertain outlook for the commonwealth. The authors indicate, however, that Puerto Rico possesses many advantages that create the conditions for economic growth over the longer term—an educated workforce, a favorable business climate and the presence of U.S. legal and financial structures.

In considering recent trends, the authors observe first that Puerto Rico’s business cycles have generally tracked those of the nation as a whole. But since the end of 2005, they note, the island’s economy has contracted: private sector employment has dropped 3.5 percent while U.S. employment has followed an upward trend. In addition, growth in wage and salary earnings has not kept pace with inflation, and housing markets have weakened.

The authors suggest that the downturn in Puerto Rico’s economy may in part be a spillover from the slowdown in such mainland industry sectors as manufacturing and homebuilding. However, factors specific to Puerto Rico have also played a role, including significant cutbacks in the commonwealth’s government sector and the recent repeal of section 936 of the Internal Revenue Code—a rule that provided tax advantages to pharmaceutical and electronics companies locating plants in Puerto Rico.

In their discussion of Puerto Rico’s economic development, the authors note that while personal income in the commonwealth is well below the U.S. average, home ownership rates are high. Three-fourths of Puerto Rican households own their homes, and an exceptionally large share of these homes—more than 60 percent, close to twice the share on the mainland—are free of mortgage debt.

Bram, Martínez and Steindel begin their analysis by noting the dramatic changes that Puerto Rico has experienced in the last half century—in particular, the shift from an agricultural to an industrial economy, a development that prompted almost a million residents (on net) to migrate to the U.S. mainland between 1950 and 2000. The authors question the notion that the migration caused a “brain drain,” or loss of skilled workers, to the mainland. They point to the steady growth in the share of college-educated workers in Puerto Rico in recent decades and cite findings that those who migrated to the mainland during the 1950-70 period were largely rural residents, unable to find work in the manufacturing sector.

Jason Bram is an economist in the Microeconomic and Regional Studies Function of the Bank’s Research and Statistics Group; Francisco Martínez is a professor of economics at the University of Puerto Rico, Río Piedras; Charles Steindel is a senior vice president in the Macroeconomic and Monetary Studies Function of the Research and Statistics Group.

Trends and Developments in the Economy of Puerto Rico ››

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