III. Financial Exploitation I: Early Extractive Economies (1900–1950)

The shift from Spanish to American rule immediately transformed the economic structure of Puerto Rico, primarily to serve U.S. capitalist interests.

A. The Monoculture Economy and Capital Influx

Following the Foraker Act, the economic landscape underwent rapid transformation due to a significant influx of American businesses and capital. This external investment accelerated the dominance of the sugar industry. By the early 20th century, Puerto Rico shifted from a diversified agrarian economy to a raw sugar supplier focused almost entirely on the protected U.S. market. This dedication of land to sugar cultivation was extensive, displacing local farmers and creating vast rural landlessness, even in areas dominated by absentee U.S. corporations. Although sugar production was critical to the economy, this dependence created a vulnerable monoculture system controlled by external capital.  

B. Capital Repatriation and the GDP/GNI Divergence

While some early economic analyses suggest that modern growth began with American rule, with impressive income per capita growth rates between 1900 and 1940 relative to Latin America , this metric obscures the true beneficiaries of the production.  

A critical economic indicator of colonial exploitation is the divergence between Gross Domestic Product (GDP) and Gross National Income (GNI). GDP measures the total economic production within the territory, while GNI measures the income earned and retained by the residents of that territory. Research shows that the New Deal era led to a “fundamental divergence between living standards, as measured by consumption, and productivity as measured by Gross National Income (GNI)”.  

When GDP significantly surpasses GNI, it provides definitive quantitative evidence of capital repatriation. The large gap confirms that the means of production—the sugar mills, the infrastructure, and the newly developing industries—were owned by U.S. absentee corporations. The profits generated by Puerto Rican labor and land were systematically extracted and flowed back to the mainland, rather than reinvested locally or accruing to the resident population. Therefore, while Puerto Rico saw technical “growth,” this structural arrangement ensured that the early 20th-century economy was fundamentally extractive, preventing the accumulation of wealth necessary for self-sustained local development.  

IV. Financial Exploitation II: The Industrial Tax Haven Model and Debt Crisis (1950–Present)

In the mid-20th century, the U.S. economic strategy for Puerto Rico shifted from agriculture to industrial manufacturing through “Operation Bootstrap”. This shift was anchored by tax incentives that ultimately created the conditions for the island’s modern financial crisis.  

A. Operation Bootstrap and the Creation of the Tax Haven

Operation Bootstrap successfully shifted Puerto Rican labor from agriculture to manufacturing and tourism, aiming for export-oriented production. The central mechanism facilitating this industrialization was Section 936 of the U.S. Internal Revenue Code, established in 1976. This provision allowed American corporations operating in Puerto Rico to repatriate profits earned on the island back to the U.S. mainland free of federal corporate income tax.  

This incentive created an environment of massive profit generation, particularly for companies in the manufacturing, electronic, and pharmaceutical sectors. By 1989, American corporate subsidiaries were earning $2.6 billion in profits annually.  

B. Mechanism of Exploitation: Super-Profits and Dependency

Section 936 facilitated the generation of “tax-free super-profits” for multinationals. The chemical industry, for example, achieved average pre-tax operating profit rates seven times higher in Puerto Rico than in the United States. This extreme profitability was frequently achieved not just through operational efficiency, but through manipulative accounting practices known as “transfer pricing”.  

Because the tax exemption applied to income generated in Puerto Rico, capital-intensive companies, especially those dealing with patented pharmaceutical products, utilized transfer pricing to artificially declare inflated profits on the island rather than on the U.S. mainland. This method allowed firms to maximize tax avoidance on profits derived from intellectual property, securing tremendous savings—nearly $400 million or more each year for U.S. chemical companies alone.  

This system engineered an economic dependency wherein the local economy was structured purely around corporate tax arbitrage. This created high GDP figures due to declared profits, but undermined the local tax base, forcing local households and businesses to shoulder some of the highest sales and income taxes under the U.S. flag. Despite significant corporate profits, the expected corresponding level of benefits was not observed for Puerto Rican residents.  

C. The Repeal of Section 936 and Economic Collapse

The U.S. Congress repealed Section 936 in 1996, beginning a 10-year phase-out period that concluded in 2006. The termination of this incentive triggered a major decline in the manufacturing sector and a loss of between 80,000 and 90,000 jobs, accompanied by a sharp decrease in capital investment.  

When the preferential tax treatment ended, corporations largely avoided returning to the U.S. mainland. Instead, they relocated their operations to other international tax havens in Asia and Europe. This relocation confirmed that the economic structure fostered by Operation Bootstrap was purely transactional and built upon a temporary tax advantage. The U.S. government established a dependent economic model and then dismantled it, triggering the recession that began in 2006.  

D. The 2006 Debt Crisis and Financial Exclusion

The economic downturn resulting from the Section 936 repeal, combined with the 2007–08 Great Recession, caused a sharp decline in Puerto Rico’s gross national income. The territorial government increasingly turned to debt issuance to cover operational spending and budget shortfalls.  

A critical vulnerability that exacerbated this debt crisis was the prior Congressional exclusion of Puerto Rico from Chapter 9 of the U.S. Municipal Bankruptcy Code in 1984. This exclusion, which applies to municipalities in U.S. states, removed the standard legal mechanism available to states and their entities for restructuring municipal debt.  

This absence of Chapter 9 protection created a “moral hazard” in the financial markets. Wall Street and other bondholders engaged in highly risky behavior, “frenetically buying up” speculative Puerto Rican bonds. Lenders calculated that because Puerto Rico was politically and strategically essential to the U.S., Congress would be compelled to intervene or authorize a bailout to prevent a systemic territorial default. This protection of high-risk financial speculation, enabled by the legislative exclusion, resulted in an inflated and unsustainable debt load that ultimately required austerity measures to service. The structure prioritized the security and potential return of creditors over the fiscal stability of the territory.  

V. Structural Financial Burdens: Regulatory and Welfare Inequity

Beyond the tax haven model and the debt crisis, the U.S. maintains institutional regulatory and welfare policies that systematically drain capital and constrain economic potential, confirming the second-class status established by the Insular Cases.

A. The Jones Act

The Merchant Marine Act of 1920, commonly known as the Jones Act, mandates that all cargo transported between U.S. ports must be carried on ships that are built, owned, crewed, and operated by U.S. entities. This protectionist policy significantly impacts non-contiguous U.S. territories, including Puerto Rico.  

1. Economic Constraints and Cost Debate

Critics argue that the Jones Act dramatically inflates shipping costs for the island, imposing a substantial economic burden on consumers and businesses. Testimony from Puerto Rican officials in the 1960s indicated that high Jones Act shipping rates distorted the island’s economic development, rendering industries reliant on heavy or bulky raw materials “almost out of the question”. This constraint limited the island primarily to light manufacturing and electronics, hampering broader industrialization. Furthermore, critics point out that the Act contributes to higher energy costs, as liquid natural gas and crude oil must also conform to the requirements, leading to expensive electricity prices.  

In contrast, industry groups such as the American Maritime Partnership defend the Act, citing joint studies that conclude the Jones Act has no impact on either retail prices or the cost of living in Puerto Rico. These reports argue that retail prices are essentially the same as on the mainland, and freight rates are lower than or comparable to similar services to neighboring Caribbean islands. They highlight the positive economic impact of dedicated, closed-loop services, which offer speed and efficiency, including cost savings estimated at $92 million annually due to the use of high-capacity 53-foot containers.  

2. Crisis Neglect

Despite the debate over routine economic burden, the structural disadvantage of the Jones Act became acutely apparent during humanitarian crises. Following catastrophic events like Hurricane Maria, the U.S. government was slow to waive the Act, exacerbating supply chain issues for emergency relief. One instance involved a 10-day waiver issued by the administration of President Trump, which was deemed insufficient to allow international ships to respond effectively, underscoring the priority placed on protecting the mainland maritime industry over the immediate welfare of the territorial population.

B. Federal Welfare and Healthcare Inequity

The constitutional status of Puerto Rico allows Congress to institutionalize disparities in federal welfare and healthcare funding, directly translating legal subordination into economic inequality for residents.

1. Medicaid Funding Disparity

Unlike the 50 U.S. states and the District of Columbia, which receive uncapped federal matching funds for Medicaid (a dollar-for-dollar matching system), Puerto Rico’s funding is subject to both a statutory cap (block grant) and a fixed matching rate (Federal Medical Assistance Percentage, or FMAP).  

Puerto Rico’s statutory FMAP is set at 55 percent. However, if the island were treated as a state, the FMAP formula, which bases the matching rate on per capita income relative to national per capita income, would entitle Puerto Rico to the maximum statutory rate of 83 percent. This disproportionately low and capped funding results in significantly restricted services. Because of the limited budget, Puerto Rico’s Medicaid eligibility standards are considerably lower than those in the states, leaving many low-income U.S. citizens ineligible. Furthermore, low payment rates for providers exacerbate a long-standing provider shortage, diminishing access to essential care. Total Medicaid spending per enrollee in Puerto Rico was only 20 percent of the U.S. average in fiscal year 2019.  

2. Exclusion from Core Safety Net Programs

In addition to Medicaid caps, Puerto Rican residents are systematically excluded from core federal safety net programs, most notably the Supplemental Security Income (SSI) program and the Supplemental Nutrition Assistance Program (SNAP).  

Instead of receiving full access, residents rely on substitute programs funded through smaller, restrictive federal block grants. For instance, the Nutrition Assistance Program (NAP) substitutes for SNAP, but imposes stricter qualification requirements and offers smaller benefits. Similarly, the Aid to the Aged, Blind, and Disabled (AABD) substitutes for SSI. Data from 2016 show the massive disparity: the average AABD benefit in Puerto Rico was $75 per person, compared to the national SSI average benefit of $551.  

This institutionalized disparity maintains a lower baseline standard of living and acts as a structural financial drain. This exclusion from full federal safety nets, despite U.S. citizenship, is a direct, ongoing application of the Insular Cases doctrine, functionally treating the population as secondary citizens to minimize federal expenditure. As legal scholars have noted, excluding citizens who can scarcely afford to pay taxes from a program intended for low-income individuals based on their tax contribution is “antithetical to the entire premise of the program”.

VI. Territorial and Human Resource Exploitation

Exploitation of Puerto Rico has extended beyond the financial realm, encompassing the degradation of territory for military use and the utilization of the population as subjects for social engineering and medical experimentation.

A. Territorial Abuse: The Military Occupation of Vieques and Culebra

For decades, the U.S. Navy utilized parts of the smaller Puerto Rican islands of Vieques and Culebra as live impact areas (LIA) and bombing ranges. This continuous military training resulted in extensive environmental degradation and pollution.  

The range areas now contain vast quantities of unexploded ordnance (UXO) and remnants of exploded ordnance, alongside hazardous substances associated with military operations, including mercury, lead, copper, TNT, napalm, and depleted uranium. This contamination poses serious risks, particularly to the 9,300 residents of Vieques and the active tourism industry that relies on accessible beaches and fisheries.  

The complexity of the cleanup operation, which involves handling UXO in rugged topography and underwater sites, has been significant. Cleanup efforts are estimated to continue through fiscal year 2032. The costs associated with prior cleanup and planned work total nearly $800 million. This substantial financial expenditure, borne primarily by the Department of Defense, represents a direct, quantifiable estimate of the environmental liability incurred by treating the territory as a military resource.  

While the Agency for Toxic Substances and Disease Registry (ATSDR) concluded in 2003 that residents were not being exposed to harmful levels of chemicals in the soil , other studies suggest a more significant environmental health toll. For example, a 1999 sample of hair collected from Vieques residents of all ages revealed that 55 percent were contaminated with lead, 69 percent with arsenic and cadmium, and 34 percent with toxic levels of mercury. The conflicting data underscore a sustained environmental imposition that continues to impact local health and limits the use of large portions of the land, much of which was designated as a wildlife refuge after military cessation.  

B. Human Resource Exploitation: Reproductive Coercion and Eugenics

The Puerto Rican population was historically subjected to comprehensive social engineering policies driven by U.S. political and economic interests under the pretext of combating “overpopulation,” poverty, and unemployment.  

1. Mass Sterilization (“La Operación”)

Between the 1930s and 1970s, Puerto Rican women of childbearing age were subjected to mass sterilization campaigns. Approximately one-third of this female population underwent the procedure, giving Puerto Rico the highest sterilization rate in the world during that time. The practice became so commonplace that sterilization was colloquially known simply as la operación (the operation).  

This campaign was underpinned by eugenic ideology, promoted by influential figures such as Margaret Sanger and funded in part by the U.S. Department of Health, Education and Welfare. The policy explicitly viewed the reproductive capacity of Puerto Rican women as a societal problem to be engineered and controlled by the colonizer, demonstrating a willingness to violate fundamental human rights to achieve policy objectives based on racial and economic anxieties.  

2. The Birth Control Pill Trials

During the 1950s, Puerto Rican women were also exploited as test subjects for the clinical development of the modern birth control pill. Scientists developing the pill specifically chose Puerto Rico because they could easily conduct trials on the women needed for study.  

These trials were marred by significant ethical violations. Informed consent standards were minimal or nonexistent, women were often not provided full information about the serious side effects of the original high dosage drug, and those who reported adverse reactions were often dismissed as “unreliable”. This ethical double standard mirrored other egregious medical experimentation conducted on vulnerable populations in the U.S. during the same era, such as the Tuskegee study. These programs demonstrated the exploitation of the human body as a resource, utilizing a marginalized population as convenient test subjects for pharmaceutical development due to the prevailing racially-informed ethical vacuum created by the colonial status.  

VII. The Modern Regime of Control: Austerity and Crisis Management (2016–Present)

The 21st century has seen the plenary power of Congress manifest in the external imposition of fiscal control and an unequal disaster response, confirming the ongoing practice of structural subordination.

A. PROMESA and the Imposition of the Financial Oversight Board (FOMB)

In response to the debt crisis catalyzed by the Section 936 repeal and Chapter 9 exclusion, Congress passed the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) in 2016. This law allowed the territory to restructure its debt, which exceeded $70 billion.  

The core feature of PROMESA was the establishment of the Financial Oversight and Management Board for Puerto Rico (FOMB). This unelected body was granted immense power to manage the island’s finances, enforce austerity measures, and negotiate debt restructuring. The FOMB’s mandate is to prioritize fiscal responsibility and renew access to capital markets, superseding the authority of local democratically elected officials in budgeting and policy decisions.  

The imposition of the FOMB represents the ultimate institutionalized climax of Congressional plenary power. Since local governance proved incapable of managing the structurally unstable economy and the debt strategy (exacerbated by the lack of Chapter 9 access), Congress implemented external, undemocratic financial management. This solution confirms that when the territory faces financial crisis, the U.S. government prioritizes creditor repayment and financial control over the democratic rights of its citizens.  

B. Disaster Exploitation: The Unequal Response to Hurricane Maria (2017)

The federal response to catastrophic natural disasters provides acute, modern evidence of the systemic inequality embedded in the territorial status. When Hurricane Maria struck in September 2017, the resulting destruction exacerbated pre-existing infrastructural weaknesses, particularly in utilities like the Electric Power Authority (PREPA) and the Aqueduct and Sewer Authority (PRASA), which had already been weakened by the financial crisis.  

The federal response to Maria was measurably delayed and provided a lower volume of resources, including money and staffing, compared to the responses for Hurricanes Harvey (Texas) and Irma (Florida), which occurred around the same time. For instance, survivors of Harvey and Irma each received nearly $1 billion in federal funds within the first two months post-landfall, while Maria funds did not reach $1 billion until four months after landfall.  

Furthermore, while Congress has appropriated approximately $62 billion in federal disaster funding for rebuilding post-Maria, this figure falls significantly short of damage estimates, which range between $100 billion and $139 billion. Compounding the problem, as of 2022, only 32 percent of the appropriated funds had been disbursed.  

This differential response, where aid to citizens in an incorporated territory was significantly prioritized over aid to U.S. citizens in Puerto Rico, provided devastating confirmation of the island’s secondary status. The resulting governance failure and delayed recovery contributed to an estimated official death toll of nearly 3,000 people and has led to mass emigration and long-term consequences for the island’s vital services and infrastructure.

VIII. Conclusion

The history of Puerto Rico as a U.S. territory is defined by a consistent, systematic pattern of exploitation rooted in a unique legal status. The entire architecture of the relationship, from the early 20th century to the present, rests on the principles established by the Insular Cases—a doctrine fundamentally justified by 19th-century notions of racial and cultural inferiority. This doctrine grants Congress plenary power, enabling the U.S. government to treat its citizens in the territory as a politically and economically subordinate class.

Exploitation has been executed through three primary structural pathways:

1. Financial Extraction: This began with the transfer of agricultural wealth through absentee ownership, evidenced by the GDP/GNI divergence. It evolved into the Section 936 tax haven model, which engineered economic dependency designed for U.S. corporate super-profits and tax arbitrage, resulting in an unstable, vulnerable economy that collapsed upon the incentive’s repeal. The subsequent debt crisis was exacerbated by the strategic denial of Chapter 9 bankruptcy protection, creating a moral hazard that benefited high-risk Wall Street investors.
2. Structural Impediment: Ongoing policies, such as the Jones Act, inflate local costs and restrict industrial diversification to protect mainland U.S. industries. Simultaneously, the intentional capping and disparity in federal welfare funding (Medicaid, SSI, SNAP) maintain a structurally lower standard of living for U.S. citizens in Puerto Rico compared to those in the states, confirming a persistent secondary status.
3. Territorial and Human Degradation: The military abuse of land (Vieques/Culebra) has left a lasting $800 million environmental debt and introduced hazardous substances, while historical eugenic programs like “La Operación” and the use of women in birth control pill trials demonstrate the exploitation of the human population as expendable resources for policy engineering and pharmaceutical development.

In the modern context, the structural legacy of exploitation is formalized through the imposition of the unelected FOMB under PROMESA, and acutely exposed by the measurable institutional neglect and lower resource allocation following catastrophic events like Hurricane Maria. The ongoing systemic disparities confirm that the island remains primarily managed as a non-sovereign asset, with financial obligations and external control prioritized over the principles of democratic governance and parity for its residents.

Treaty of Paris & Early Governance

Treaty of Paris | End of Spanish-American War, Cuba Independence – Britannica
Treaty of Paris (1898) – Wikipedia
The Foraker Act of 1900: Its Transformative Effects on Puerto Rico – West Side Destination
Foraker Act (1900) | Britannica
Foraker Act of 1900 (PDF)

Insular Cases & U.S. Legal Status

The Insular Cases: Comparative Historical Study – Federal Bar Association
Insular Cases and the Supreme Court | EBSCO
The Insular Cases and Doctrine of the Unincorporated Territory – U.S. Commission on Civil Rights
Insular Cases – Wikipedia
Downes v. Bidwell (1901) – Justia
Downes v. Bidwell – Teaching American History
Balzac v. Porto Rico – Wikipedia
Balzac v. People of Porto Rico (1922) | First Amendment Encyclopedia

Economic Development & Sugar Industry

The Rise and Decline of Puerto Rico’s Sugar Economy – USDA
The Sugar Industry – Agrarian Puerto Rico (Cambridge)
Arrested Development? Puerto Rico in an American Century – AEA
Arrested Development? | Journal of Economic History – Cambridge

Operation Bootstrap & Section 936

Operation Bootstrap & Puerto Rican Labor – ResearchGate
The Effect of Section 936 – Senate Finance Committee
Insular Cases & Civil Rights of Puerto Ricans – USCCR
Intangible Assets, Corporate Taxes & Pharmaceutical Relocation – NBER
Section 936: A Corporate License to Steal – Solidarity

Debt Crisis & Oversight Board

Puerto Rico: A U.S. Territory in Crisis – CFR
Puerto Rican Government-Debt Crisis – Wikipedia
Puerto Rico’s Public Debts: Accumulation and Restructuring – Congress.gov
Puerto Rico’s Debt Crisis – CFR
Puerto Rico’s Exclusion from Chapter 9 – St. John’s Law
Wall Street Bailouts & Puerto Rico – ScienceOpen
Wall Street’s Power Grab in Puerto Rico – ACRE Campaigns
Financial Oversight and Management Board for Puerto Rico – About
Financial Oversight Board – FAQ

Jones Act

Understanding the Jones Act – Investopedia
Jones Act’s Cost to Puerto Rico – Cato Institute
The Jones Act and Puerto Rico – American Maritime Partnership
How the Jones Act Cripples Puerto Rico’s Recovery – History.com
The Jones Act Revisited – Mercatus Center

Federal Programs & Medicaid

Recent Changes in Medicaid Financing – KFF
Medicaid Funding Structures & Latino Health Inequities – PMC
Medicaid Block Grants in Puerto Rico – Commonwealth Fund
Puerto Rico Faces Medicaid Cuts – CAP
Exclusion from Federal Benefits – Missouri Law Review
Safety Net Loopholes Hurt Puerto Ricans – CAP
Feasibility of SNAP in Puerto Rico – USDA

Vieques & Military Use

Atlantic Fleet Weapons Training Area – Vieques (EPA)
Defense Cleanup in Vieques & Culebra – GAO
GAO Report: Cleanup in Vieques (PDF)
ATSDR Public Health Assessment – Vieques
ATSDR Summary – Vieques Bombing Range
UN: Bombing Impacts on Human Rights – Vieques

Sterilization & Reproductive Control

The Eugenic Sterilization of Puerto Rican Women – Chapman University
Sterilization of Puerto Rican Women – UW-Madison Libraries
Autonomy Revoked – TWU
Eugenics & Reproductive Coercion – UW Milwaukee
The Puerto Rico Pill Trials – PBS
Facts & Ideas on the Pill Trials – PMC
The Pill and Informed Consent – PBS

Hurricane María & Disaster Response

Hurricane María & Public Health in Puerto Rico – PMC
Less Hurricane Aid to Puerto Rico – University of Michigan
Quantifying Inequities in Disaster Response – PMC
Federal Government Response to Puerto Rico – Hispanic Federation
Hurricane Maria Worsened Health Care Crisis – Commonwealth Fund