Post-Crisis Opportunities in Puerto Rico

Destructive Cycles

When Hurricane Maria struck in Sept. 2017, Puerto Rico was already in the midst of a deep economic crisis. The unemployment rate was over 10% --the highest in the US and more than double the national average-- with nearly 50% of the population living below the poverty line. The economy was in a prolonged recession and the government was undergoing the largest bankruptcy in American history. Real GDP had fallen 15 percent between 2005 and 2013 while the government accrued $73 billion in debt. The island’s population was dwindling as residents migrated to the mainland. This “brain drain” further weakened the island’s recovery prospects as many of the brightest and most enterprising young Puerto Ricans left in search of educational and employment opportunities commensurate with their ambitions.

All of these problems were accelerated when Hurricane Maria tore into Puerto Rico’s fragile infrastructure, leaving virtually the entire island without power and cutting off access to food, clean water, and medicine for hundreds of thousands of people. One month after Maria, an op-ed in The Hill noted “the situation is much worse, the unemployment rate is close to 100 percent and the physical infrastructure of the island had been wiped out.” In November of that year, The Census Information Center of the University of Puerto Rico in Cayey estimated that the unemployment rate on the island was as high as 60%.

There are substantive disagreements over the best path to recovery and reform, but everyone agrees that it must be done now. Extreme weather events like Hurricanes Irma and Maria are likely to become even more frequent in the future. If Puerto Rico cannot transform its infrastructure and economy to become more resilient, it risks being trapped in a cycle of destruction and reconstruction, taking a step back for every one it takes forward.

Historical Roots of the Crisis

Puerto Rico’s infrastructure and economy are extremely fragile, a legacy of the island’s colonial past, which has seen it treated, according to Nelson Denis, as “little more than a profit center for the United States: first as a naval coaling station, then as a sugar empire, a cheap labor supply, a tax haven, a captive market, and now as a municipal bond debtor and target for privatization."

The power grid depends on imported fossil fuels distributed inefficiently over long distances by a government-controlled power company (PREPA) with a long history of incompetence and corruption (as evidenced by the Whitefish scandal).

A controversial piece of legislation called the Jones Act --passed in 1920 on national security grounds-- requires all goods transported between US ports to be carried by US owned, built, and operated ships, making “just about everything in Puerto Rico more expensive” due to the increased shipping costs. A 2010 University of Puerto Rico study estimated the cumulative cost of the Jones Act at $537 million per year.

In spite of its fertile soils and tropical climate, as much as 85% of all food consumed on the island is imported. The lack of agricultural productivity is partly a legacy of the economy’s former reliance on cash crops, especially sugar cane. Operation Bootstrap, an initiative launched in 1947 to transform the island into an industrial hub for cheap domestic manufacturing, has been overtaken by globalization and has done little to develop a workforce prepared for the rise of the information economy. Puerto Rico’s income inequality is the second worst of any US jurisdiction after the District of Columbia, and the island suffers from a general lack of financial inclusion and social mobility.

Why Property Rights Matter

We have written elsewhere about the general importance of property rights. Land is the foundation of wealth, and for most Americans, real property is the primary source of capital. In the developing world, formal property rights are an important tool for increasing household income and agricultural productivity, promoting gender equality, and protecting indigenous communities from encroachment by political and corporate interests.

In Puerto Rico, property rights matter because they are essential for creating resilient housing and a more inclusive economy. Informal property is rare enough in the mainland US that it is rarely discussed outside the context of international development. In Puerto Rico, an estimated 55% of properties are informal, and 30% of documented properties are not recorded in the registry.

Resiliency, Recovery, and Development

The consequences of this informality were visible in the destruction caused by Hurricane Maria. The construction quality of informal homes is typically low because they are not built to code. Without loans for construction, building is done piecemeal and corners are cut with cheap materials and unlicensed labor. Recovery was further hampered by the low rate of insurance. In Puerto Rico hazard insurance is only required for mortgage-holders, meaning that informal settlements were almost entirely uninsured.

Some informal communities will likely have to be rebuilt in new areas that are less vulnerable than their current sites, which are often on undesirable, flood-prone land. In some cases these settlements were founded by people displaced by previous storms. One such community is Villa Hugo, an informal settlement of 6,000 which “emerged on a public wetland after 1989’s Hurricane Hugo left thousands homeless.” As the government points out in its draft recovery plan, while informal settlements in particularly vulnerable areas will have to be resettled, elsewhere the government should help those communities rebuild and improve their properties. These structures must be replaced with strongly-built, hurricane-resistant homes, with their inhabitants’ property rights recorded in similarly resilient registries. Some property records were also destroyed in the hurricane, though this problem was less widespread than it might have been prior to the digitization of Puerto Rico’s property registry.

Approximately 60% of FEMA assistance claims were rejected, including many cases in which applicants who needed help rebuilding could not provide titles to prove ownership of their homes. The problem was so pervasive that FEMA began accepting affidavits as evidence of property ownership in place of formal documents.

Challenges

One of the most formidable obstacles facing policymakers is the lack of information about land and property occupancy, use, and condition. Both the recovery efforts and planning for future disasters require data garnered from a comprehensive asset mapping program. This will be difficult in Puerto Rico, where there are many absentee landlords and vacant rental properties. Discovering the full truth on the ground will be an expensive and time consuming endeavor, but it presents an enormous opportunity to simultaneously address one of the most fundamental obstacles to disaster resilience and to economic development. Once the data has been gathered, formalizing these properties will have the added benefit of expanding Puerto Rico’s tax base and increasing government revenues in a time of financial crisis.

It should be noted that the financial status of even the formal properties on the island is precarious. The one year foreclosure moratorium imposed by HUD in the wake of the hurricane will expire on August 16th, and it is not yet clear how many people will be able to resume payments. According to a December 2017 New York Times article, “about one-third of the island’s 425,000 homeowners are behind on their mortgage payments to banks and Wall Street firms that previously bought up distressed mortgages…” and “... 90,000 borrowers became delinquent as a consequence of Hurricane Maria.”

Property rights will also have a major role to play in the future development of Puerto Rico’s economy. Real estate is already 15% of PR’s GDP, and the government is committed to increasing investment in that sector. The key to this strategy has been offering massive tax breaks to companies and high-net-worth individuals who relocate to Puerto Rico.

This policy, combined with the austerity measures imposed by the unelected Financial Oversight Board --a panel appointed by the federal government to manage the recovery of the Puerto Rican economy-- has fueled accusations of disaster capitalism. Critics fear that the government’s policies will turn Puerto Rico into resort a for wealthy tourists while gutting essential services like education.

It is worryingly easy for vulnerable people to be removed from their homes through eminent domain in order to make way for private developments. If PR is starting to emerge from an economic low point, everyone needs to share in the growth. Granting formal rights to informal communities will help protect them from exploitation, give them equity in the reconstruction, and afford them increased access to financial markets.

Opportunities

The phrase “Build Back Better” [PDF] has become something of a mantra for Puerto Rico Governor Ricardo Rosselló. His government’s draft recovery plan demonstrates a clear understanding of the importance of property rights in building a more resilient and prosperous Puerto Rico. It remains unclear, however, how exactly that plan will be implemented, and if the government will have the resources to do so effectively. HUD awarded Puerto Rico an $18.5 billion reconstruction grant, less than half of the $46 billion requested.

But the reconstruction does not have to come exclusively from the top down.The badly botched Federal response to Hurricane Maria created a widespread conviction that greater independence from the mainland (and centralized systems in general, e.g. of energy distribution) will be necessary for the creation of a truly resilient and sustainable Puerto Rico. There is real reason to hope that the many local organizations that sprang up in the wake of the storm will coalesce into a movement capable of bringing about change from the bottom up.

These include mutual-aid soup kitchens, community land trusts, mesh networks for emergency communication, and solar microgrids. The common elements in these projects are self-reliance, social responsibility, and the embrace of innovative technologies. The Government of Puerto Rico is providing strong incentives for entrepreneurs and technologists in order to grow and modernize the economy while luring back members of the diaspora, reversing the brain drain of recent years. And evacuees and other members of the diaspora are returning: 72,000 in the first four months of 2018.

FPR will continue to follow this story, highlighting opportunities for emerging technologies to impact land rights in Puerto Rico. The island remains in crisis as it enters another hurricane season. Time will tell whether the prevailing sense of unity and urgency, paired with tech innovation, will make the story of Puerto Rico’s recovery one of American renewal in the digital age.

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