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Singeli Agnew for Al Jazeera America

Working People's Party leader: Hedge funds can blackmail Puerto Rico

Professor Rafael Bernabe says the debt-ridden island needs a New Deal-type program to solve its debt crisis

In “The Puerto Rico Gamble,” Fault Lines travels to San Juan as protests erupt over the island’s crippling debt crisis and Wall Street’s growing influence on its economy. The film premieres on Monday, Oct. 19, at 10 p.m. Eastern time/7 p.m. Pacific on Al Jazeera America. | Click here to find Al Jazeera in your area.


Puerto Rico is more than $70 billion in debt, leading the island’s government to embrace new austerity measures, while at the same time offering lucrative tax exemptions for foreign investors. But critics say this approach only serves to exacerbate inequality.

One of them is Rafael Bernabe, a leader of Puerto Rico’s Working People’s Party, who noted that even the business press has questioned the government’s reaction to the debt crisis. “It's logical that a lefty like me says that,” said Bernabe, who is also a professor at the University of Puerto Rico at Río Piedras. “But you know, even Forbes magazine says this is crazy.” 

Fault Lines spoke to Bernabe about the crisis facing the island. An edited version of the conversation follows:


Fault Lines: What's your assessment of the situation Puerto Rico is in right now?

Bernabe: I think the debt crisis is, in the final analysis, a symptom of a deeper crisis. That is, behind the debt crisis stands the crisis of the Puerto Rican economy. Puerto Rico's economy has not grown for a decade now. It's completely stagnant in terms of income, in terms of employment and in terms of generating government revenue. And that is going to generate problems—among them, probably, a problem of debt.

Now what stands behind the stagnation of the Puerto Rican economy is the exhaustion of the effectiveness of what has been the main tool of Puerto Rico's government to try and promote economic growth in Puerto Rico: the policy of tax exemption. The policy of tax exemption seems to attract basically U.S. or external investments into Puerto Rico so that they create employment in Puerto Rico, general economic growth in Puerto Rico. And they will collect little or no taxes from these corporations that operate in Puerto Rico.

This policy has been in place in one way or another since 1947. And you could make an argument that for many years this policy functioned at least partially. That is to say there was investment, there was economic growth, there was growth of employment. Even though at the best of times, unemployment was very high—you know, 14 percent, 15 percent, which is triple the unemployment rate in the United States—up until the mid-1990s.

But after that, that policy has ceased functioning, very evidently. It's not generating employment. It's not generating economic growth. It's not generating higher government revenue. And what you have now is an economy which creates a tremendous amount of profits—about $35 billion a year that leave the island.

Who is making those $35 billion in profits?

Basically U.S. corporations operating in Puerto Rico. To give you a number to compare it to: All the taxes that the Puerto Rican government collects in a year amounts to about, at best, $9 billion. So this is $35 billion,  it's almost four times the amount total tax collected by the government. Needless to say, if that money leaves the island, it is not reinvested in Puerto Rico. Therefore, it does not create employment in Puerto Rico. It does not create economic growth in Puerto Rico.

Secondly, you have a tendency or a push towards migration. That is to say if you have very high unemployment rate in Puerto Rico, and people cannot find jobs, then many of them will migrate to the United States. In some periods this has been a massive migration, as it was in the 1950s and early 1960s, for example. And some would argue that we are now in a new mass migration, given the present crisis. There are thousands of people living in Puerto Rico moving to the United States, trying to find the jobs that they do not find here.

That explains why, in spite of the fact that Puerto Rico has been under U.S. rule for more than a century now and there's freedom of movement between Puerto Rico and the United States and so on, wages in Puerto Rico are still much lower than in the United States. On the average across all industries, wages in Puerto Rico are about 60 percent of what they are in the United States. The per capita income of Puerto Rico is about half of that of the poorest state of the United States.

What might Americans not understand about the economic realities here compared to the rest of the country? Sure, U.S. companies are making $35 billion here and taking it out of the economy. But this is part of the United States. 

I would say probably the key feature of the Puerto Rican economy for more than a century now has been the fact that the key sectors of the Puerto Rican economy are controlled by largely U.S. corporations. Whether they be the old sugar companies or manufacturing companies in the '50s and '60s, pharmaceutical companies today, whichever.

And so it's a very dire situation. Again, the contradiction or the paradox is that while you have a government which does not have enough revenue to provide the services it should provide, while you have these terrible levels of poverty, you still have an economy in which a considerable amount of profit is generated. So that's one of the things that one has to look at if one wants Puerto Rico to recuperate, you know, economically speaking. We have to look into the long-term dependency on foreign investment, which has been a feature since the 19th century. And we have to look into the tax exemption policy which has been part of that for the longest time.

It's not because people have many welfare benefits that they don't go to work. It's because they don't have work, because they cannot find jobs, that they have to rely on welfare benefits.

Rafael Bernabe

head of the Working People's Party

What do you make of the government’s approach to solving the fiscal crisis?

We think that the people who propose these measures have it backward, to put it diplomatically. I mean it's not because people have many welfare benefits that they don't go to work. It's because they don't have work because they cannot find jobs that they have to rely on welfare benefits. I mean, if there were well paying jobs out there people would take them. But those jobs are not there. So it's not the extension of welfare benefits in Puerto Rico is not the cause of the problem. It's a result of the problem. 

The government would say that they have been addressing the crisis by cutting education spending. For example, they say the system is bloated with too many employees that needs cutting back, and there are too many schools.

We would agree that the education department, for example, has too bureaucratic a structure. It spends too much money in the bureaucratic administrative aspect of the education process instead of the teaching process. We think closing schools is something that you could approach in two ways. The government approaches it as basically a budget issue. And God knows what what schools they are going to close under what logic.

It's not simply a bureaucratic budgetary mission that we have to eliminate 300 schools, and then you will notify some community that the school that they have had for many years—which is part of the life of the community, which is an important element of that town—isn't gonna be there anymore.

Former students and their parents sit outside the Jose Melendez Ayala School—in Manati, an hour west of San Juan—to protest its closing earlier this year.
Singeli Agnew for Al Jazeera America

What other alternatives are available to the Puerto Rican government?

One of them is you can reconsider the policy of tax exemption, and you can start taxing some of these corporations and therefore generate revenue that way. Or you can not do that and you can start borrowing an increasing amount of money. And that is what happened. This has to do with the crisis in Greece and many other places, which is a regime in which creditors have more or less the expectation that they are going to be able to get back their investment no matter what.

The notion that creditors are going to be able to get their money back, because the government will have no recourse but to pay, one way or another, also invites the presence of hedge funds and vulture funds because they see that the bonds of Puerto Rico are selling at a discount because investors are worried that they may not be able to get some of their profits back. And their whole business depends on buying them at a discount and then making sure they get paid at face value, eventually—you know, this is the business of hedge funds.

Some of these investors have organized. There's a group called “The Ad Hoc Group,” which is a group of about 38 investment funds that own a considerable amount of the debt of Puerto Rico. They have in fact issued their own analysis of the Puerto Rico situation. It's a document called "There's A Better Way For Puerto Rico," the logic of which is very simple: The debt has to be paid. The debt cannot be renegotiated. Puerto Rico has to pay the debt.

And the investors want that to happen without restructuring?

No restructuring whatsoever. And in order to pay the debt, Puerto Rico has to cut back on government spending. We have to close schools. You have to lower the welfare benefits. You have to lower health benefits. You have to take whichever austerity measures, are necessary in order to pay for the debt. And Puerto Rico has to borrow more money, so they can keep functioning while paying the old debt.

The influence they have is their tremendous economic power. And to the extent that the government of Puerto Rico is willing to confront them in a more militant, I would say, or aggressive way, if you wanna use that word, then they have a tremendous power to blackmail the government. I mean the argument is: “You owe us this money. If you don't pay us, we are going to go to court. We are going to litigate. It's going to be a very costly process.”

And the government is in agreement with this investment group?

The position of the government is slightly different. They argue the debt is unsustainable, which I think I agree with them on. The debt has to be renegotiated. There's has to be some restructuring of the debt. But they agree with The Ad Hoc Group and the investors that austerity measures have to be implanted. 

So the government right now is in the process of enacting a whole series of austerity measures. They're going to try to rewrite labor laws in Puerto Rico, probably cut back welfare benefits, probably privatize some parts of the government and so on—which we think is unfair, because they are going to hurt working people, which have already been hurt terribly by the present crisis. They are only going to depress the economy even more than it is now, which has been the case in other places when these austerity measures have been applied.

So where do you fall between these two options?

We push for a third position, which argues that we have to restructure that debt and we don't have to, and we should not, apply these austerity measures.

We think there should be an input by the federal government for a program of economic reconstruction in Puerto Rico. During the Great Depression, which is the period that is comparable to where we are now. In the context of the New Deal, there were some institutions created in Puerto Rico by the federal government.

The most important one was the Puerto Rico Reconstruction Administration, a federally funded program to reconstruct the economy of Puerto Rico—to electrify the country, for example, to construct dams, to construct roads, to construct schools. So we need that type of New Deal publicly funded infrastructure, economic development-type of project, which is needless to say, exactly the opposite of the new, liberal, privatizing, free-trade dogma that has been dominant, you know, ever since the 1980s. 

In the same fashion that the government in Puerto Rico collaborates with Wall Street and investors, we have to collaborate with progressive movements in the United States to seek a different way out of the crisis.

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