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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 airs on Sunday, Oct. 25, at 9 p.m. Eastern time/6 p.m. Pacific on Al Jazeera America. | Click here to find Al Jazeera in your area.
In 2012, Puerto Rico’s government passed two laws, 20 and 22, with the goal of attracting tens of thousands of outside investors and corporations to the island on a promise of nearly zero taxes. The territory was deep in debt, a figure that topped $70 billion this year, and officials hoped the infusion of wealth would help jumpstart its economy.
Critics of the plan, however, say such tax breaks threaten to only exacerbate the gap between rich and poor in what is already one of America’s most unequal places. The poverty rate in Puerto Rico is close to 45 percent—three times the U.S. average.
Fault Lines spoke to Alberto Bacó, Puerto Rico’s secretary of economic development about the impacts of the laws—and how he views his critics. An edited version of that conversation follows:
Fault Lines: How would you describe the transformation that's taking place in Puerto Rico's economy right now?
Bacó: It is a transformation from a mainly manufacturing economy. We forgot that manufacturing evolved, and manufacturing now doesn't employ as many people as it used to. Services have become more important in the world. And what we used to do was only provide tax incentives to manufacturing. We are doing that for service companies and for individuals now. But we have other advantages. Tourism is only 6 percent of our economy and it’s underdeveloped.
The big problem that Puerto Rico now has is the big debt. Why do we have that debt? Because in the last 20 years, the politicians forgot about promoting this new economic transformation and they decided it was so easy to get credit that the investment bankers just offered more and more debt. And the politicians were not responsible to stop that and say we need to do more economic development.
So for people that read the headlines about Puerto Rico defaulting and going through these terrible economic times, what would you say to them?
Official unemployment measured by the United States has gone down from 16.5 percent to 11.9 percent. We have the best occupancy in hotels in 20 or 30 years. The rate per hotel room, the revenue is going up—over 5 percent this year and 4 percent last year. And you don't see any big manufacturing closing anymore. And the tourism is just unique. And we are ready to receive more people, because unfortunately, through the crisis year, a lot of people left. And we are asking them to come back and give us the opportunity.
One other thing that is important is the kind of investor that we are attracting. We are attracting successful, proven billionaires on the top 100 list of investors in the United States and probably in the top 200 investors of the world—coming here to buy properties, to buy hotels. And if you add that to the fact that they can move to Puerto Rico and be totally tax-exempt from capital gains and passive income, they are betting on that.
Let's talk a little bit about the tax incentive laws, Acts 20 and 22. How would you say they're important for the economic recovery?
They are important because they are the reason that the sophisticated investor is seeing a future in Puerto Rico. And the sophisticated investor is the one that’s buying the expensive properties, are buying the debts from the government. People from Latin America are understanding that. And in simple terms, they say through these two laws, Act 20 and 22, it's the backdoor entrance to the United States. Because they can do business in the United States and instead of keeping 50 percent of what they make, they keep 96 percent of what they make, channeling their investments through Puerto Rico.
We're very open to business. We are aggressive. We follow up on companies. The companies don't follow up on us.
secretary of economic development, Puerto Rico
What is the pitch for a company looking to invest in Puerto Rico?
First of all, to newcomers that are willing to invest in Puerto Rico, we provide them almost zero taxes. Why is that? Because they create activity, they employ our people and they spend money in our economy. So they end up sharing the tax burden. The second is, how skilled our workforce is—which is bilingual and bicultural. And bicultural is a strong point, because what that means is that we feel as Latin Americans, but we think as the U.S. when we go to business.
And you're actively looking for companies to come in?
We're very open to business. We are aggressive. We follow up on companies. The companies don't follow up on us. We are seeing that companies are doing a little more due diligence because they have to understand what will happen with the debt renegotiation. But apart from that, we're seeing that our name, Puerto Rico, is becoming better known.
In five years, by the projections, we'll have 4 percent [tax] on 4,000 companies that will be making income from Puerto Rico. And that will create an additional layer of taxpayers. And from the active companies, I'm projecting 100,000 jobs and $3 billion in tax revenues.
Some would say there could be a cause for concern there, because some of these companies are the same ones that have gone into other countries that have defaulted on their debt because it's an opportunity for them. Is that not a concern for you?
It's not a concern. Because I have a point that I meet all of them. And what I have seen, looking at their eyes, is that they are becoming residents of Puerto Rico. They are not becoming residents of Spain, when there's opportunity in Spain, or a resident of Greece. It's a fact that they're buying low. But that's important for local people, because if not, our people will not have anyone to sell the property to.
Do you think these investors have Puerto Rico's best interests at heart?
Well, I will say it's the same thing when you start dating. Probably you are dating because there's a physical attraction. And I think the relationship develops. Some people get married, some people get divorced. Or they never get married.
This is one of the most unequal places in the entire United States. The gap between rich and poor is wider here than it is anywhere else.
Bringing in hedge fund billionaires and having five-star, six-star hotels opening up for those investors to come in and stay while they look for properties to buy so that they can take advantage of those tax incentive laws, isn't that going to just simply exacerbate the inequality that already exists and is such a problem?
The reality is that each one of these people that have moved under Law 20 and 22 have created three, four jobs, are using our engineers, are using our architects, are using our publicity companies, are buying the properties, are going to our restaurants, are using helicopter services—the pilots are very happy—are using catering for the jets, are creating economic activity that are giving jobs to people, are giving work. And it's something that you had zero, and you have nothing to lose. They are adding up.
The fact that some people want to criticize is because they are born that way. They are born losers. They have never been able to succeed. And they see something successful, they begin to find a point. But I cannot see a negative on all of this situation.
At the same time, there are so many painful austerity measures that are being carried out by the government. Some would say that, for the rich, there's not the same level of sacrifice that is being undertaken by the working class.
But that’s the theory of poverty—that you create more economic activity by dividing the poverty and the scarcity of resources. You bring people out of poverty by education ...
But you're cutting education.
... and by bringing wealth to the system.
But you're making cuts on the education. Teachers are losing their jobs. Schools are being closed.
But that has nothing to do with the economic promotions that we are doing. It's something that needed to be done, because it was not done when it should have been done. So now it's painful, because we have to make the right decisions that were long overdue, and it will create some pain. But the way to solve it is bringing wealth to work in the system, not by dividing the scarcity of resources between more people.
But a lot of schools have been closed, right?
It's a lot of schools, because we have a lot less students. And we never adjusted the amounts of schools and of teachers. What we are doing is making it more efficient. In the process, there are people that suffer and go through pain. But I believe it's temporary.
So that pain is not as big as some people think. You just go to shopping centers. Puerto Rico sales per square feet have gone up over the last 10 years every year. And so in consumption, you don't see that sacrifice. That some people may not be working in the formal economy, they are still working, and you will go around and see, there is not extreme poverty in Puerto Rico.
But the poverty rate here is way higher than in any U.S. state.
That's also true. We are, on measurement, we are half the per capita income of the poorest state.
So poverty is a reality here. So these kinds of cuts and austerity measures, they're gonna have an impact on people's lives.
I think that there will be more consolidation. But as I said, I don't think that it will be really pain. It's getting us to a modern Puerto Rico where we're more efficient and the opportunities are in other areas. People will have to adapt, will have to retrain. But for that, we have a lot of programs.