Trends & Developments in the Economy of Puerto Rico

A two-year-long economic downturn and a persistent income gap with the U.S. mainland contribute to an uncertain outlook for Puerto Rico. Still, the commonwealth possesses a skilled and educated workforce, a favorable business climate, and the benefits of U.S. legal and financial structures—advantages that could encourage the development of new industries and create the potential for sustained growth.

Readers of this publication who are accustomed to thinking of the Federal Reserve System’s Second District as New York State and nearby counties in New Jersey and Connecticut may be surprised to learn that the District includes the Commonwealth of Puerto Rico.1 In this issue of Second District Highlights, we present an overview of Puerto Rico’s economy, examining its basic characteristics, long-term industry and labor trends, and prospects for growth.

In our analysis, we apply many of the tools used to examine the economy of a U.S. state. After all, Puerto Rico’s population of nearly 3.9 million exceeds that of twenty-four states, and its area of about 3,500 square miles, while small, roughly matches that of Connecticut. However, our analysis also recognizes that Puerto Rico possesses unique institutional and structural features—its location, status as a commonwealth, and large public sector—that set it apart from the fifty states. Its economy is unusual too in having been directly influenced by federal legislation—most notably, section 936 of the Internal Revenue Code, which until its recent repeal provided incentives for the capital-intensive production of chemicals and pharmaceuticals.

Our look at the economy of Puerto Rico highlights some dramatic changes over the last half century: a shift away from agriculture, a large out-migration of people to the mainland United States, and the growth of certain sophisticated manufacturing industries. Despite economic advances, however, Puerto Rico remains considerably less affluent than any U.S. state. Indeed, while the United States as a whole and other parts of the Second District continued to grow through 2007, recent economic data suggest that the commonwealth’s economy has contracted over the last two years.

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