State and Local Issues

New Deal Mentality Stymies Competition In Puerto Rico

Many Puerto Ricans cling to a New Deal mindset, observers report. An example is a strike by telephone company workers protesting proposed privatization of the island's government-run telephone company -- which quickly spread when 50 other Puerto Rican unions staged a two-day sympathy walkout.

While the Puerto Rico Telephone Company uses modern equipment and its service is generally good, it is not efficient.

  • The company operated 204 lines per worker in 1996 -- compared with more than 300 at Bell Atlantic.

  • Its return on capital is far below that of mainland providers.

  • It has rapidly lost share in the cellular phone market -- the fastest-growing part of the industry.

Experts say the phone company's plight is only one example of how Puerto Rico is losing out in the global economy because of its residents' dependence on government.

  • Per capita gross domestic product (GDP) in Puerto Rico is one-third that of the U.S. mainland -- but is masked by transfer payments by Medicaid, Medicare, Social Security and a variety of other social programs.

  • Social safety net programs, application of the national minimum wage and federal tax breaks for manufacturing keep wages quite high -- so high the island has difficulty competing with the rest of the Caribbean economy in attracting tourists and in manufacturing labor-intensive products.

  • So the island's unemployment rate stands at about 14 percent.

With the tax breaks scheduled to be phased out over the next six years, economists say Puerto Rico's future depends on also phasing out its welfare state -- even if that means fighting the vested interests it has created.

Source: Peter Passell, "Telephone Privatization Tests Economic Will of Puerto Rico," New York Times, July 16, 1998.

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