The current pandemic has exposed the fragility and vulnerability of the U.S. medical supply system. This pandemic won’t be the last, and it has become abundantly clear that the U.S. shouldn’t rely on one or two foreign countries for such essential supplies.
As we search for shovel-ready projects to fight the COVID-19 virus and lay the groundwork to be better prepared for the next, we need to look no further than Puerto Rico.
The small island of Puerto Rico has been hit with over 2000 cases of COVID-19 as its already fragile health care system has been wracked by earthquakes, Hurricane Maria and a debt crisis — all of which have received very little support from the U.S. By restoring a 21st century version of Section 936 of the U.S. Tax Code, Congress could help put Puerto Rico back on track and safeguard the U.S. from pandemics.
Section 936 gave tax breaks that drew firms to Puerto Rico and by the 1990s, the island had grown into a powerhouse of the pharmaceutical and medical equipment supplies industry — attracting giants such as American Medical Optics, Allergan, GlaxoSmithKline, Pfizer, Abbot, Merck, Bristol-Myers, Ely Lilly and Baxter Travenol. They produced medicines, vaccines and medical equipment in vast quantities, making them readily available for the U.S. market, of which the island is part.
This was the result of Operation Bootstrap, the industrialization strategy by Puerto Rico’s then-governor, Luis Muñoz Marín, after World War II. This policy catapulted the island from one of the most destitute territories in the Caribbean archipelago to one of notable prosperity and progress. Starting with lower-end industrial products like garments and textiles, it quickly evolved into higher-end merchandise.
In the 1970s and 1980s, the pharmaceutical and medical supplies sector had become the mainstay of the Puerto Rican economy, providing well-paying jobs throughout the island. A highly skilled bilingual labor force, a friendly business climate and favorable tax conditions kept assembly lines humming. An elaborate university system, including first-rate schools of engineering like that of the University of Puerto Rico-Mayaguez, supplied the professional and managerial staff needed to run such complex manufacturing operations.
Section 936 didn’t benefit all Puerto Ricans. The program contributed to widening income gaps in Puerto Rico, as the rural sector could not keep pace with the new engine of Puerto Rican growth and many of the firms failed to pass on productivity gains to their workers and domestic firms. For these reasons, and by those pursuing statehood, it was Puerto Rico that lobbied to revoke the tax benefit, which was phased out from 1995 to 2005, just in time to tip Puerto Rico over the economic edge as the global financial crisis hit.
The island entered a spiral of negative growth (manufacturing employment fell by 4 percent a year from 2007-2017) and it has not recovered since. Economists for the National Bureau of Economic Research estimate that the massive job losses have resulted in a decrease in the average wage by almost 17 percent and shrank industry by close to one-third. Indeed, in 2017, unable to pay the U.S. a $72 billion debt, Puerto Rico filed for bankruptcy and is now governed by a Fiscal Control Board appointed by the U.S. Congress that makes all key financial decisions.
The impact of Hurricane Maria in 2017 and a subsequent earthquake in 2019 have wreaked further havoc. According to 2018 U.S. Census data, 43 percent of all adults and 57 percent of all children in Puerto Rico live under the poverty line. It is estimated that since 2005 close to a million Puerto Ricans have left the island for the mainland. The companies moved their operations to China, India and Ireland. The United States, on the other hand, was left without a secure and steady supply of medicines and medical equipment within its own territory, the price for which is being paid now.
Restoring Section 936 of the U.S. Tax Code could be a win-win proposition. Rather than spending years trying to find ways to bring industry back to U.S. territory, Puerto Rico presents us with a shovel-ready alternative — if the returning firms are required to share profit with workers and the island as a whole. Such a move would help save Puerto Rico from decades of crisis, and help prepare us for the next pandemic.
Kevin P. Gallagher is the director of the Global Development Policy Center at the Frederick S. Pardee School of Global Studies, Boston University. You can follow him on Twitter @KevinPGallagher. Jorge Heine is a professor at the Pardee School. You can follow him at @jorgeheinel.