Puerto Rico Economic Pulse ©

May 2014: Lessons Puerto Rico Has Not Learned

Analysis of Puerto Rico and New York City’s fiscal crises

Forty years ago, on March 1974, the price of oil rose from US$3 per barrel to nearly $12. Due to the island’s strong dependency on oil for its energy needs, this oil crisis caused a deep economic recession in Puerto Rico with real GNP growth decelerating from 5.1% in FY1973 to 1.3% in FY 74 and finally –1.9% in FY1975. General Fund revenues, particularly corporate income taxes and other revenue sources, dropped significantly. In March 1974, Governor Rafael Hernández Colón retained the services of renowned economist James Tobin to provide recommendations on how to exit the then economic, fiscal, and financial crisis. With the US Municipal bond market closed in 1975, the Government Development Bank (GDB) negotiated the first Bank Note Purchase Agreement to provide financing to the Government. Simultaneously, New York almost defaulted on its public debt in 1975 and had to implement tough measures. In 2014, PR is immersed in its yet deepest economic recession. Did we learn anything from these crises?