Austerity on the Island

Puerto Rico, with more than $70 billion of bonds at stake, has become a testing ground of austerity for an economy in decline. The Oversight Board, created in 2016 to address the territory's debt crisis, has leaned toward the conservative prescription of spending cuts and tax increases to restore fiscal discipline and restore growth. Liberal economists have warned that austerity will ultimately stall growth, putting both citizens and bondholders at risk of a repeat crisis.

This series, Austerity on the Island, looks into whether the board's approach to Puerto Rico — which it prefers to call right-sizing or right-rating — is the best way to bring about economic growth and minimize societal pain.

Part 1 examines how the board created its fiscal plan and how austerity fits into the plan, and gives examples of countries and states such Ukraine and Peru that the board says have used similar tools to address fiscal and economic crises.

Part 2 presents the research and arguments of leading proponents and opponents of austerity, finds some shortcomings in the economists' conclusions, and looks into the past experience of several countries with fiscal crises, most notably Portugal, where alternatives to austerity proved effective.

Part 3 highlights the potential societal costs of austerity in general, and of the Oversight Board's fiscal plan on the vulnerable population of Puerto Rico in particular, where poverty is about three times the U.S. average.

Part 4 presents the opinions of experts on how to improve the island's finances, most of them economists whose ideas diverge from those of the board.

Part 5 examines the board's current predicament. With much of the board's plan yet to be implemented, it suggests the board could take other approaches to avoid austerity's pitfalls.