Puerto Rico at a Crossroads: Structural Barriers to Competitiveness in the Age of AI

Introduction

Puerto Rico is facing critical challenges that threaten its economic future as it strives to compete with the 50 U.S. states and other territories. Over the past decade, structural weaknesses – ranging from an unreliable energy system to a weak innovation ecosystem – have hindered growth. On top of these issues, labor and climate vulnerabilities have caused the island to fall behind on key economic indicators. As we enter the era of artificial intelligence (AI), these challenges become even more pronounced: without immediate reforms, Puerto Rico risks falling even further behind in the digital economy. This report takes a close look at Puerto Rico’s competitiveness through five key lenses: structural economic challenges, labor and climate risks, AI readiness, comparative benchmarks, and policy solutions. The goal is to present a comprehensive, evidence-based portrait of Puerto Rico’s competitive position and to recommend actionable reforms to foster resilience and innovation.

1. Structural Economic Challenges

Puerto Rico faces several deep-rooted structural issues that weaken its economic competitiveness. These issues include high-cost, unreliable energy, a tax-burdened economy, a weak innovation framework, and the absence of top-tier research universities. These factors combine to create an environment that struggles to retain talent and attract investment. Each factor reinforces the others, creating an environment that struggles to retain talent and attract investment.

High-Cost, Unreliable Energy

Puerto Rico’s energy system is a significant burden. The island faces some of the highest electricity prices in the U.S., and the power grid is prone to regular disruptions. More than 90% of Puerto Rico’s electricity is generated from imported fossil fuels, making costs volatile and expensive. As of 2023, Puerto Rico’s average electricity price ranked as the fourth-highest in the nation, surpassed only by Hawaii, California, and Connecticut. On average, Puerto Ricans pay about 60-70% more for power than residents in other states. In early 2025, residential electricity cost about 27¢/kWh in Puerto Rico compared to 16¢ nationwide. This high energy cost creates a significant competitive disadvantage, increasing the cost of living and doing business. The island’s aging power grid, which has suffered from underinvestment and damage from hurricanes, adds to the problem. Major storms, like Irma and Maria in 2017, caused the longest blackout in U.S. history. Even after repairs, outages remain frequent. In December 2024, a power plant failure caused a blackout that affected 1.2 million customers. These issues not only drive up costs but also deter manufacturers, complicate business operations, and undermine efforts to build a modern, technology-driven economy.

Heavy Government Intervention and Tax Burdens

Puerto Rico’s economic policy environment has been heavily shaped by government intervention, which contrasts with the more market-driven economies of many U.S. states. The island relies heavily on federal support, with federal transfers making up about 40% of Puerto Rico’s government revenues and about 31% of personal income. This reliance on federal aid creates disincentives for local workforce participation and private investment. Additionally, Puerto Rico has one of the highest corporate tax rates in the world at 37.5%, far above the U.S. average of about ~25.7%. This tax burden, combined with dense regulation, makes it difficult for businesses to expand. Puerto Rico also has numerous occupational licenses, 34 of which are required on the island but are not needed in most U.S. states. This regulatory red tape discourages entrepreneurship. According to the World Bank’s pre-2020 assessments, Puerto Rico ranked about 65th among 190 economies, far below the U.S. average, which typically ranks in the top 10. Cumbersome regulations and high energy costs stifle private-sector growth. Without reforms to streamline regulations and lower taxes, Puerto Rico will continue to fall behind the U.S. states in attracting investment.

Weak Innovation Infrastructure

Unlike many U.S. states, Puerto Rico lacks a robust public policy framework or institutions to drive research and innovation. Government support for R&D and tech entrepreneurship has historically been minimal. The island invests far less in research and development than the mainland, both in absolute and per capita terms. In 2021, Puerto Rico’s R&D spending was only $212 per person, compared to $2,376 per person for the U.S. on average. Such underinvestment is symptomatic of a policy gap – no comprehensive strategy or funding stream for innovation. Puerto Rico does not have state-equivalent programs like many states’ technology grants, innovation funds, or major research centers. Compounding the issue is limited private R&D: multinational firms on the island (e.g. in pharmaceuticals) conduct manufacturing but little research locally. As a result, Puerto Rico’s innovation ecosystem is shallow, with fewer high-tech startups, patents, and knowledge spillovers compared to U.S. hubs.

No R1 Research Universities

Another key weakness is Puerto Rico’s lack of R1 research universities. The Carnegie Classification designates R1 universities as those with very high research activity, and every U.S. state has at least one or in process of having one. Puerto Rico’s leading universities, such as the University of Puerto Rico (UPR) campuses in Río Piedras and Mayagüez, are classified as R2, indicating lower levels of research activity. Without R1 universities or strong local R&D institutions, Puerto Rico struggles to retain its talented graduates. For example, approximately 40% of engineering graduates from UPR-Mayagüez leave for mainland jobs. Puerto Rico’s lack of top-tier universities also means it misses out on billions in federal research grants, further limiting its innovation capacity. This talent exodus and research gap perpetuate a cycle where fewer high-tech industries emerge on the island, leaving fewer opportunities for STEM professionals and leading to further talent outflows.

Puerto Rico’s economic foundation is weakened by high energy costs, a burdensome fiscal environment, and an underdeveloped innovation ecosystem. These issues put Puerto Rico at a disadvantage compared to U.S. states, which benefit from cheaper energy, greater economic freedom, and more robust research and development. Addressing these issues is crucial for Puerto Rico to boost growth and productivity.

2. Labor and Climate Vulnerabilities

Beyond its structural economic challenges, Puerto Rico faces significant labor market and climate risks that further hinder its competitiveness. A healthy, resilient economy requires an active workforce and protection from disruptive shocks – areas where Puerto Rico struggles when benchmarked against other jurisdictions.

Lagging Labor Force Participation

Puerto Rico’s labor market is marked by extremely low engagement of its working-age population. The island’s labor force participation rate (LFPR) – the share of adults either employed or actively seeking work – hovers around 43–44%, which is by far the lowest in the United States. For context, the U.S. national participation rate is about 62%, and even the lowest U.S. state (West Virginia) has a rate above 55%. In fact, according to World Bank data, Puerto Rico ranks 232nd out of 233 countries/regions in labor participation, essentially the lowest in the world. This indicates a vast reserve of untapped labor and signals systemic issues like outmigration, discouragement, and dependency. Multiple factors drive Puerto Rico’s low participation: an aging population, the lure of stateside opportunities for young workers, and welfare rules that often disincentivize formal employment. Additionally, years of economic stagnation and public-sector contraction have shrunk job opportunities, leading many to stop looking for work. The consequences are severe – a smaller workforce means lower productivity and consumer spending, a weaker tax base, and increased reliance on federal aid. It also means businesses in Puerto Rico face a narrower talent pool compared to states, which can deter investment. Boosting labor participation (through incentives like the local Earned Income Tax Credit, workforce training, and childcare support) is thus essential for Puerto Rico to strengthen its economy.

High Unemployment and Informal Employment

In addition to low labor force participation, Puerto Rico also experiences high unemployment, often in the double digits (though it had improved to around 6–8% by 2019–2023). Even though the unemployment rate improved in recent years, Puerto Rico still faces a significant informal economy where workers are employed off-the-books and don’t contribute to tax revenue or productivity metrics. Informal work is partly a result of the complex regulatory environment and high labor costs, making it harder for workers to find formal jobs. Overall, Puerto Rico’s labor utilization remains well below potential, especially among younger and prime-age workers. According to the New York Federal Reserve, the island’s labor participation for those under 24 is extraordinarily low, and many skilled youth simply leave. Until Puerto Rico can create more and better jobs at home, it will not keep pace with states on economic growth.

Population Decline and Demographics

Puerto Rico’s population has been shrinking for years, due to both migration and declining birth rates. From 2000 to 2023, the island’s population dropped from 3.8 million to 3.2 million. The outflow of working-age adults following Hurricane Maria, which caused over 120,000 people to leave in 2017-2018, has been particularly damaging. This demographic shift, along with an aging population, places more pressure on the remaining workforce to support the economy. Puerto Rico’s dependency ratio has worsened, meaning fewer workers are supporting more retirees. The shrinking population and talent drain undermine Puerto Rico’s long-term competitiveness.

Climate Change and Hurricane Exposure

Puerto Rico is on the front lines of climate vulnerability, with hurricane risk far beyond that of any state. Situated in the hurricane belt, the island has been struck repeatedly by major storms – most infamously Hurricane Maria in 2017, which caused an estimated $90 billion in damage and killed roughly 3,000 people, devastating infrastructure in one blow. To put that in perspective, the Maria disaster cost was equivalent to Puerto Rico’s entire annual economic output, a shock no U.S. state has had to endure in recent memory. Recovery from Maria (and Irma the same year) has taken years, with some effects still felt in power reliability and housing. More recently, Hurricane Fiona (2022) again knocked out power island-wide. Climate models predict increasing frequency of intense hurricanes, plus threats from rising temperatures and changing rainfall patterns. Puerto Rico’s geographic exposure means it faces chronic disaster-related disruptions that most states (save perhaps Florida or Louisiana) encounter far less often. Each major event not only causes immediate destruction and huge recovery costs, but also has long-term economic impacts: businesses close or delay investments, insurance costs soar, and thousands migrate to the mainland after each catastrophe (as seen after Maria). The constant threat of storms creates uncertainty that can deter capital investment compared to more climate-sheltered states.

Infrastructure Fragility 

Decades of underinvestment and storm damage have left much of Puerto Rico’s infrastructure – electric grid, water systems, roads – in fragile condition. For example, many components of the power grid still date to the 1960s and 1970s, and deferred maintenance contributed to severe failures during disasters. Ports and telecommunications also suffer outages from storms. This fragility means that even moderate natural events can cause outsized disruptions. Businesses in Puerto Rico must contend with more frequent and longer interruptions to operations (e.g. power or internet outages) than their counterparts in the mainland, unless they invest in costly backups. Such conditions are a competitive drag, especially for industries that require continuous uptime or logistics reliability.

In sum, Puerto Rico’s human capital and climate resilience are under strain. A comparatively small share of its people are active in the economy, and those who are face the looming threat of climate-induced setbacks. Many U.S. states enjoy both higher labor participation and less severe disaster risks, giving them a steadier platform for growth. Puerto Rico will need targeted policies – from labor incentives to climate-resilient infrastructure – to overcome these vulnerabilities and level the playing field.

3. Risks in the Era of Artificial Intelligence

The rise of artificial intelligence and the digital economy presents enormous opportunities – but also risks of widening divides. Puerto Rico’s structural deficiencies could severely hinder its integration into an AI-driven global economy, leaving it further behind U.S. states that are quickly adapting to and benefiting from new technologies. As AI, automation, and digital tools transform industries, regions that cannot support or participate in this transformation will face lost economic opportunities and competitiveness.

Digital Infrastructure Gaps

A fundamental requirement for AI and modern digital services is robust connectivity – an area where Puerto Rico lags significantly. Broadband internet access on the island is well below U.S. standards. As of 2022, only about 52% of Puerto Rican households had access to wired broadband (cable, fiber, or DSL). Even counting mobile internet, nearly 30% of residents report no home internet at all, compared to only about 10% of Americans nationwide without internet. The figure above illustrates this digital divide: roughly 70% of Puerto Rico’s households have internet access, versus about 90% for the U.S. as a whole. In practical terms, many Puerto Ricans lack the reliable high-speed connectivity needed for AI-era applications like cloud computing, teleworking, online education, or advanced data analytics. Rural parts of the island are particularly underserved, with some municipalities seeing internet uptake as low as 18%. This digital infrastructure shortfall means Puerto Rico is ill-prepared to partake in AI-driven innovations such as telemedicine, e-commerce, or smart manufacturing, all of which assume ubiquitous internet. By contrast, virtually all U.S. states have made strides in broadband expansion, and the mainland tech hubs benefit from ultra-high-speed networks. Puerto Rico’s digital gap could therefore translate into an innovation gap, where new AI tools and services simply bypass the island.

Innovation and Talent Pipeline Concerns

The AI revolution is fueled by research and talent in STEM fields – another area where Puerto Rico is vulnerable. As discussed, the island’s R&D investment is a small fraction of U.S. levels, and it lacks large research universities or AI labs. This means Puerto Rico is not a significant source of AI research, patents, or startups. There are budding efforts, but these are isolated. Meanwhile, leading states are pouring resources into AI: universities in California, Massachusetts, etc. are churning out AI research and graduates; states like Arizona, North Carolina, and others rank highly in digital readiness with robust tech sectors. Puerto Rico risks being left on the sidelines of the AI boom, its workforce not trained for the new jobs and its institutions not creating or adopting AI at scale. Workforce readiness is a particular concern – advanced industries require skills in coding, data science, and engineering. Puerto Rico’s educational system, especially K-12, has struggled (e.g. math and science scores lag U.S. averages), and without R1 universities, graduate-level training in AI-related fields is mostly obtained off-island. The result could be a widening skill mismatch where local workers can’t fill the few AI/tech jobs that do emerge, forcing companies to import talent or base operations elsewhere.

Brain Drain in Tech

The digital economy enables remote work and distributed teams, which in theory could benefit places like Puerto Rico. However, without local opportunity, the pattern so far has been that many of Puerto Rico’s tech-savvy individuals leave for mainland jobs. As one example, graduates securing six-figure tech jobs are departing the island, contributing to a talent drain in the very sectors crucial for AI-era growth. If AI accelerates automation of lower-skilled jobs, Puerto Rico’s economy – which currently leans on lower-wage manufacturing and services – could be hit hard unless it cultivates higher-skilled tech employment to replace them. States that foster tech ecosystems will capture the new jobs designing and managing AI, whereas regions without such ecosystems will mainly feel the disruptive effects (job losses in traditional sectors) without the upside.

Consequences of Falling Behind

Failing to integrate with the AI-driven economy could have serious long-term consequences for Puerto Rico’s competitiveness. AI is poised to boost productivity dramatically; jurisdictions at the forefront will attract investment and enjoy higher growth. If Puerto Rico cannot improve its digital infrastructure and innovative capacity, it may see a productivity divergence where its output per worker lags even further behind states taking advantage of AI. This would translate into lower incomes and standard of living relative to the mainland. Moreover, industries present in Puerto Rico, like pharmaceuticals or customer service centers, might relocate or automate if the local environment isn’t conducive to the next generation of technology. For instance, an AI-enabled call center could potentially operate anywhere; if Puerto Rico doesn’t offer cost or talent advantages, those jobs could vanish. Similarly, manufacturing is increasingly high-tech (industry 4.0, IoT, robotics); without reliable power and internet and skilled tech workers, factories in Puerto Rico might not upgrade and could become obsolete or move to more tech-friendly locales.

In essence, Puerto Rico faces a risk of digital marginalization. The structural deficiencies we’ve detailed – costly energy, poor infrastructure, weak innovation institutions – all impede the very things an AI economy needs: cheap, reliable power for data centers; ubiquitous connectivity; R&D engines; a pipeline of tech talent. The next section will quantitatively benchmark some of these factors against other U.S. jurisdictions, but the qualitative point is clear: without urgent improvements, Puerto Rico may miss out on the AI revolution, reinforcing its economic stagnation relative to faster-moving states.

4. Comparative Analysis

To better understand Puerto Rico’s relative standing, we can benchmark the island against U.S. states (and the national average) across several key dimensions: energy reliability and cost, economic freedom, innovation and R&D, educational attainment, labor participation, and digital (AI) readiness. The data reveal just how far Puerto Rico trails in many areas essential to competitiveness.

Energy Costs and Reliability 

Energy is a glaring outlier. Puerto Rico’s electricity prices are among the highest under the U.S. flag. As noted, in 2023 Puerto Rico’s average power price would rank 4th-highest among all states. Residential rates on the island (~27¢/kWh) are roughly 65% above the U.S. average (16¢/kWh), and commercial rates are more than double the mainland average (28¢ vs 13¢). States like Louisiana or Washington enjoy power at one-third of Puerto Rico’s cost. High energy costs act like a tax on every business and household, undercutting Puerto Rico’s competitiveness in manufacturing, tourism (hotels pay huge electric bills), and more. Reliability is harder to quantify but clearly worse in Puerto Rico. While the typical U.S. customer sees ~8 hours of power outage per year, Puerto Rico’s outages after Maria were measured in months, and even in normal times the frequency of brief blackouts is much higher than any state (Puerto Rico’s grid experienced multiple complete failures in the last five years – an almost unheard-of scenario in the states). By contrast, the most resilient states (e.g. Arizona, North Dakota) have built robust grids with minimal downtime. In energy infrastructure, Puerto Rico’s gap is large: it is working to modernize its grid via privatization (LUMA Energy) and adding renewables, but as of 2024 progress is modest and outages continue.

Economic Freedom and Business Climate

Although there isn’t a single official index ranking Puerto Rico’s economic freedom alongside states, various indicators suggest it would rank at the very bottom across the U.S. and near the bottom globally. One proxy is dependency on government funds: Puerto Rico is 4th among all U.S. jurisdictions in reliance on federal aid for its budget, indicating a less self-sustaining economy. On tax climate, the Tax Foundation’s State Business Tax Climate Index does not include territories, but if Puerto Rico’s 37.5% corporate tax were factored, it would be by far the highest in the nation (for comparison, Iowa’s top rate ~9.8% is the highest state rate, and most states are under 7%). Puerto Rico’s sales tax (IVU) of 11.5% is also higher than any state’s statewide sales tax. Regulations such as occupational licensing requirements and permitting delays likewise exceed those in most states. The World Bank’s Doing Business 2015 report pegged Puerto Rico’s rank at 57 globally, which if compared to U.S. states would be very poor – the U.S. as a whole ranked 7th that year, and every individual state would likely score higher if isolated. The New York Fed noted that Puerto Rico’s business environment makes it “costly and cumbersome” to start or expand firms, pointing to elevated electricity costs, complex regulations, and underdeveloped infrastructure as key issues. In summary, Puerto Rico’s economy is significantly less free or business-friendly than the typical U.S. state’s, which tends to correlate with lower growth and investment.

Innovation and R&D

States are often ranked on innovation (e.g. the Bloomberg Innovation Index, Milken Institute’s State Technology and Science Index). Puerto Rico rarely features in these rankings, but by underlying metrics it would place low. For instance, R&D intensity (R&D as a % of GDP) in Puerto Rico is very low – roughly 0.6% by 2022, versus the U.S. average of ~3% of GDP. In per capita terms, as shown earlier, Puerto Rico’s $212 per capita R&D is less than one-tenth the U.S. average. Even the least R&D-intensive states (like Wyoming or Alaska) invest more per capita in R&D than Puerto Rico. Patent production is similarly lagging – Puerto Rico averages only about 30–40 patents per year (many tied to pharmaceutical firms), which on a per capita basis is well below any state (the lowest state, Mississippi, still generates a higher rate of patents). The island also hosts no major research institutions or federal laboratories, whereas many states have at least one national lab or major federal research facility injecting innovation activity. Education capacity in advanced fields is also weaker: Puerto Rico produces only ~100 PhDs per year in science and engineering, a tiny pipeline compared to even small states (for example, New Mexico, with a similar population, produces several hundred). Furthermore, Puerto Rico’s educational attainment lags – only 28.5% of adults have a bachelor’s degree or higher, versus about 35% nationwide (and over 50% in the most educated states). For advanced degrees, Puerto Rico is last: 7.9% of adults hold a graduate degree, lower than any state. This matters for innovation, as higher education correlates with knowledge economy jobs and research activity. One brighter spot: Puerto Rico does have strengths in specific niches (it ranks relatively well in innovation capacity in Latin America, being second in digital competitiveness in that region). For example, the IMD World Digital Competitiveness Ranking placed Puerto Rico 44th of 67 economies, ahead of larger countries like Mexico and Brazil. This suggests that despite shortcomings, Puerto Rico has pockets of skilled talent and tech adoption – likely due to its high college enrollment and historical engineering emphasis. However, against U.S. states, which dominate the top of such rankings, Puerto Rico remains an underperformer.

Labor Force and Productivity

We’ve detailed Puerto Rico’s labor force participation gap – at ~44% it is far below any U.S. state’s rate. This means, relatively speaking, Puerto Rico’s labor utilization is the lowest among all jurisdictions. Even states with older populations like Maine manage a 58% participation rate, still 14 points higher than Puerto Rico. The unemployment rate in Puerto Rico (pre-pandemic) was ~8–10%, also higher than most states in recent years (~3–6%). Combining these, the share of population employed in Puerto Rico is extremely low (~34%), versus ~57% in the mainland – a huge gap in effective workforce. This translates into lower output: Puerto Rico’s GDP per capita (~$32k) is less than half the U.S. average (over $70k) – a disparity that stems from both fewer people working and lower productivity per worker. Productivity itself is hard to measure given data differences, but one indicator is GDP per employed person, where Puerto Rico also trails most states (likely due to less high-tech industry and more low-wage service jobs). For example, manufacturing productivity in Puerto Rico has been stagnant, whereas many states have seen gains by modernizing production. Labor productivity is intimately linked with innovation and investment – areas where Puerto Rico underinvests, as discussed. Hence, on broad competitiveness measures, Puerto Rico underperforms: the 2019 World Economic Forum Global Competitiveness Report (if Puerto Rico were treated separately) scored it around 65/100, which would rank near the bottom of U.S. states.

AI/Digital Readiness 

While there is no official “AI-readiness index” by state, we can compare proxies like broadband access, tech workforce size, and STEM job concentration. On all counts, Puerto Rico lags. Broadband subscription: ~70% of households in PR vs ~86% U.S. average (and 90%+ in top states). Tech workforce: Puerto Rico’s share of jobs in information technology and related fields is only ~2%, whereas the U.S. average is ~4% and in tech hubs (Washington, Colorado, etc.) it’s 6–10%. High-tech GDP: only about 5% of Puerto Rico’s GDP comes from high-tech sectors (primarily pharmaceuticals manufacturing), whereas in states like California or Massachusetts it’s 15–20%. Even states not known as tech centers often have burgeoning digital sectors that Puerto Rico lacks (for instance, Utah and Virginia host large data centers and cloud computing hubs – Puerto Rico has none of that). Another angle: startup activity – Puerto Rico sees relatively few new tech startups or venture capital deals. In 2022, Puerto Rico had only a handful of venture capital deals, whereas even the smallest states see dozens annually. These metrics underscore that Puerto Rico is not yet a player in the AI/tech economy, whereas states are rapidly advancing. Of course, Puerto Rico has some initiatives (coding bootcamps, an emerging startup scene in San Juan, etc.), but at a systemic level it ranks poorly in digital readiness.

In summary, the comparative data paint a sobering picture: Puerto Rico ranks at or near the bottom of U.S. jurisdictions in energy affordability, labor participation, and innovation inputs, while also scoring low in education and digital infrastructure. These weaknesses help explain its persistent economic underperformance. On the positive side, Puerto Rico’s high tertiary enrollment and presence of some skilled professionals mean it has latent potential – but unleashing that potential will require significant reforms and investments, as outlined next.

5. Policy Recommendations

Reversing Puerto Rico’s competitive decline and closing the gap with U.S. states will require bold, targeted reforms. Given fiscal constraints, the island must be strategic, leveraging federal support and public-private partnerships. Below are specific actionable recommendations addressing each structural challenge, along with examples of how similar reforms have succeeded elsewhere:

1. Energy Sector Reform and Resilience

• Accelerate Grid Modernization: Complete the ongoing grid overhaul with urgency – replace outdated transmission lines, bury key lines to protect from storms, and expand microgrids for critical infrastructure. Use federal funds (FEMA, CDBG-DR) to finance resilient infrastructure. Success example: After Hurricane Katrina, Louisiana invested in hardened grid infrastructure and saw improved reliability in subsequent storms.

• Diversify and Decentralize Power Generation: Reduce reliance on imported fossil fuels (currently ~90% of generation) by aggressively developing renewables (solar, wind) and battery storage. Set clear targets (e.g. 50% renewable by 2035) and streamline permitting for renewable projects. Renewable microgrids can insulate communities from island-wide blackouts. Success example: Hawaii, facing high costs, enacted policies to reach 100% renewable energy by 2045 and already gets ~30% from renewables, helping stabilize costs. Puerto Rico’s sun and wind resources are strong – exploit them to lower long-term prices.

• Promote Competition and Efficiency: Introduce competition in power generation to drive down costs, with regulatory oversight to ensure savings are passed to consumers. Success example: Many mainland states deregulated generation in the 1990s, which, coupled with regulation, led to more competitive rates for consumers in states like Texas and Pennsylvania. Puerto Rico’s regulator should similarly encourage cost competition and penalize under-performance (e.g. fines for excessive outages).

• Energy Efficiency and Distributed Resources: Implement island-wide energy efficiency programs (LED lighting, efficient appliances, building retrofits) to cut demand and bills. Also incentivize rooftop solar + home battery installations via rebates and net metering – this can rapidly expand capacity and resilience. Success example: Post-2017, Puerto Rico’s own cities like San Juan have encouraged solar kits for homes; scaling this up with policy support could emulate how California achieved over 1 million solar rooftop installations, reducing grid strain.

2. Economic and Regulatory Reforms

• Streamline Business Regulation: Launch a “Ease of Doing Business” initiative to simplify and digitize permits, licenses, and registrations. Eliminate or reform occupational licenses that are not essential for health and safety (Puerto Rico has ~13 unique licenses not seen elsewhere – scrutinize these for removal). Set up one-stop online portals for business registration and construction permits. Success example:Georgia (USA) undertook deregulation in the 2000s, cutting red tape and establishing quick online licensing, which contributed to it becoming a top state for business. Puerto Rico’s regulators can collaborate with the private sector to identify the most onerous rules to cut.

• Tax Incentive Restructuring: While Puerto Rico cannot easily cut tax rates across the board due to fiscal pressures, it can reform tax incentives to spur growth. Expand targeted credits for R&D activities and manufacturing investments that create jobs. Simplify the tax code to broaden the base and lower rates gradually – for instance, reduce the corporate tax from 37.5% by eliminating certain exemptions. Continue implementing the local Earned Income Tax Credit and Act 154 extension to encourage labor participation and business hiring. Success example: Ireland in the 1980s lowered corporate taxes significantly and attracted massive investment; Puerto Rico cannot match Ireland’s 12.5% rate now, but even moving closer to U.S. state rates (~21% federal + local) would improve attractiveness. Also, emulate states like Nevada or Florida which have no state income tax – while Puerto Rico relies on income tax, it could shift toward consumption taxes and use special economic zones with tax breaks to draw investments.

• Reduce Government Footprint Smartly: Pursue ongoing fiscal reforms under PROMESA to right-size the public sector without crippling services. Continue consolidating agencies and improving efficiency (e.g. the Civil Service Reform initiative). The aim is to lower government spending (and thus tax needs) while actually delivering better outcomes through efficiency and e-government. Success example: Michigan in the 1990s and Tennessee more recently undertook civil service reforms that cut costs and improved responsiveness, which improved investor confidence. Puerto Rico’s Oversight Board has prescribed such measures – execution is key.

• Leverage Federal Funds for Growth Projects: Rather than using federal transfers just to plug budget gaps, direct more of these funds into productivity-enhancing investments. For example, use federal education grants to modernize school STEM programs, or FEMA mitigation funds to create jobs in resilience projects. Also seek more federal discretionary grants (EDA, USDA, etc.) by preparing competitive proposals – many states hire teams to capture federal grants. Puerto Rico should fully tap Infrastructure Investment and Jobs Act and Inflation Reduction Act funds for broadband, clean energy, and transportation projects that boost long-term growth.

3. Building an Innovation Ecosystem

• Upgrade the University of Puerto Rico (UPR) System: A flagship recommendation is to transform UPR (particularly Río Piedras and Mayagüez campuses) into research powerhouses. This requires increased funding for research facilities, attracting star faculty/researchers (possibly by offering competitive salaries via public-private chairs), and developing new PhD programs in critical fields (AI, biotech, renewable energy). The local government, even if funds are tight, can reallocate some budget or bond funds toward endowed research centers at UPR, and actively partner with federal agencies. Federal avenue: Advocate for a federal designation of UPR as a HUBZone or establish a National Laboratory satellite in PR (e.g. a tropical research institute) to channel federal R&D dollars. Success example: States like North Dakota (UND) and South Dakota (SDSMT) secured federal support to build research centers in aerospace and underground science respectively, elevating them to R1 status. Puerto Rico can similarly lobby for federal research initiatives (perhaps related to climate resilience, given its unique position) to be sited at UPR.

• Research and Development Incentives: Introduce or enhance R&D tax credits for companies conducting research in Puerto Rico. Create innovation zones or science parks with tax abatements, streamlined permits, and partnerships with universities (UPR, Polytechnic, etc.) to incubate startups. Expand grant programs like the Puerto Rico Science, Technology & Research Trust to offer seed funding for local tech startups and commercialization of academic research. Success example: Israel in the 1990s used incubators and grants to jumpstart its tech sector; North Carolina’s Research Triangle Park leveraged state-university collaboration to attract R&D-heavy companies. Puerto Rico should study these models and implement a tailored version (perhaps a TechnoPark near Mayagüez for engineering startups or in San Juan for software and creative industries).

• Foster Public-Private-Philanthropic Partnerships: Engage diaspora talent and U.S. universities to collaborate on research initiatives in Puerto Rico. For instance, form partnerships between UPR and stateside R1 universities (maybe a joint research center with MIT or Georgia Tech focusing on renewable energy or AI ethics in Puerto Rico). Encourage philanthropic foundations to invest in Puerto Rican innovation – e.g. the Puerto Rico Science Trust could seek grants from U.S. foundations for island-specific research (such as tropical disease, climate adaptation tech, etc.). Success example: After Hurricane Maria, the Open Society Foundations and others funded civic tech and energy projects on the island; building on that, a formal innovation philanthropy campaign could be launched. Additionally, replicate how Houston leveraged oil industry support for university research – in Puerto Rico, seek contributions from pharmaceuticals and aerospace firms present on the island to sponsor labs and scholarships (some pharma companies have already started partnerships with universities; scale this up).

• Talent Retention Programs: Stem the brain drain by creating clear pathways from education to employment in cutting-edge fields on the island. For example, establish a “Puerto Rico Fellows” program that offers top STEM graduates funding and placements in local industries or research labs, provided they stay for a certain number of years. Expand remote work infrastructure to enable young professionals to work for global companies while residing in Puerto Rico (e.g. promote co-working hubs with reliable internet and power). Success example: Tulsa Remote in Oklahoma successfully attracted remote tech workers by offering incentives; Puerto Rico can do similar, marketing its quality of life and now ability for U.S. citizens to work remotely from there. Also, fully implement the Digital Nomad Act (Act 52) to attract continental U.S. remote workers and entrepreneurs, injecting innovation into the local ecosystem.

4. Labor Force Activation and Education

• Boost Labor Participation via Incentives: Expand the local Earned Income Tax Credit (EITC) and childcare support to make work more rewarding relative to public assistance. Puerto Rico recently increased its EITC with federal support – ensure this continues and is well-publicized so that it draws people into formal jobs. Consider work requirements or gradual benefit phase-outs for able-bodied adults on assistance, to encourage re-entry into the workforce (as suggested in local policy debates). Success example: U.S. states like Maine and Kansas saw increased labor engagement after tying work requirements to certain benefits and expanding EITC. Puerto Rico’s unique situation (high disability benefit usage, informal work prevalence) means careful calibration is needed, but the principle is to ensure work pays.

• Workforce Development Programs: Invest in vocational and technical training aligned with industries that have growth potential in Puerto Rico – such as renewable energy technicians, healthcare, IT support, and advanced manufacturing. Leverage programs like the Workforce Innovation and Opportunity Act (WIOA) to fund apprenticeship and on-the-job training partnerships with employers. For instance, create an AI/data analytics training program in collaboration with tech companies, so local workers can fill roles in the expanding analytics field (even if serving clients remotely). Success example: Nevada post-recession trained workers for solar and tech jobs, reducing unemployment. Similarly, South Carolina’s apprenticeships in manufacturing helped raise labor participation. Puerto Rico can emulate these by working with its Department of Labor and private sector to sponsor training cohorts, particularly targeting women and older workers (groups with low current participation on the island).

• Education Reform for Future Skills: Overhaul K-12 education with a focus on STEM and bilingual proficiency, to better prepare the next generation. Strengthen English teaching as it remains crucial for participating in global and AI-driven markets. Promote hands-on coding and robotics programs in schools (some exist, but scale them island-wide). Expand early college high school programs or dual-enrollment where high schoolers can take courses at universities in tech subjects. Success example: Arkansas made computer coding classes mandatory in high schools and saw a boom in students pursuing computer science – Puerto Rico could do the same. Additionally, improve basic education outcomes (literacy, numeracy) by reducing school bureaucracies and directing resources to teacher training and student support; states like Florida showed dramatic K-12 improvement through accountability and literacy initiatives which Puerto Rico’s Education Department could adapt.

• Leverage Diaspora for Mentorship and Networks: There is a large Puerto Rican diaspora on the mainland, including successful professionals in business, tech, and academia. Create formal networks to connect them with opportunities on the island – e.g. a mentorship program for young entrepreneurs, or a “come home” campaign that highlights quality of life improvements and incentives (lower housing costs, Act 60 tax incentives, etc.) for those who return to start businesses. Success example: Ireland in the 2010s actively courted its diaspora to return or invest, which contributed to its tech sector growth. Puerto Rico can similarly turn brain drain into “brain circulation” by maintaining ties with those who left and making it attractive for them to boomerang back, even if only for a few years or as part-time residents starting enterprises.

5. Climate Resilience and Disaster Preparedness

• Invest in Resilient Infrastructure: Harden critical infrastructure – elevate flood-prone roads, build sea walls where needed, reinforce bridges – to withstand future storms. Adopt updated building codes that mandate wind-resistant construction (like Florida did post-Hurricane Andrew). Expand the use of underground utilities in urban areas to reduce wind damage to power and telecom lines. Success example: After Superstorm Sandy, New York and New Jersey invested billions in resilient infrastructure (e.g. floodgates, backup power for hospitals) which have mitigated damage from subsequent events. Puerto Rico must do the same on an island-wide scale, given its perpetual hurricane risk.

• Decentralize Essential Services: Ensure that each region of Puerto Rico has local capacity to provide essentials (water, medical services, communications) in case of island-wide infrastructure failure. This might mean solar-powered water filtration systems in each municipality, backup satellite internet for communication centers, and distributed health clinics with telehealth capabilities. The idea is to avoid total paralysis when one grid goes down. Success example: In Japan, after its earthquakes, communities built self-sustaining hubs with independent energy and water – Puerto Rico’s local governments, with guidance and funding, could pursue similar community resilience hubs.

• Emergency Response Enhancement: Strengthen Puerto Rico’s emergency management agencies via training and resource integration with FEMA and state National Guards. Pre-position generators, spare parts, and relief supplies before hurricane season each year. Improve early warning systems and public communication (multilingual, across all media). The faster Puerto Rico can bounce back after a disaster, the less long-term economic scarring (e.g. businesses not permanently closing, people not emigrating). Success example: Cuba, despite economic limits, has a robust hurricane evacuation and shelter system leading to lower loss of life – Puerto Rico can at least match best practices in preparedness to reduce chaos and damage. Florida’s response to recent hurricanes (Ian, 2022) also shows the value of coordinated emergency management; Puerto Rico’s agencies should participate in joint drills with states to learn best practices.

• Climate Adaptation and Economic Diversification: Finally, incorporate climate risk into all planning. Develop industries that are less vulnerable to climate disruptions – for instance, promote more knowledge-based and remote-work industries that can continue even if physical infrastructure is hit. Encourage agricultural resilience through modern techniques (hydroponics, protected agriculture) to reduce food supply shocks. Essentially, diversify the economic base so that a hurricane doesn’t incapacitate the entire economy. Success example: Some Caribbean islands have diversified into digital services and financial tech (Barbados, for example) to complement tourism, which helped during climate events. Puerto Rico, with its U.S. linkage, could attract back-office operations or software development shops that can operate from anywhere, giving it a revenue stream that isn’t weather-dependent.

Implementation and Collaboration

Achieving these reforms will require coordination across federal, state, local, and private actors. The Federal Government can assist by extending and tailoring programs to Puerto Rico’s needs – for instance, continuing to fund the local EITC, ensuring equitable infrastructure funding, and possibly granting waivers or special programs (like excluding Puerto Rico from the Jones Act to lower shipping costs, which would reduce energy and goods prices). Public-private partnerships are key, as the government alone cannot finance everything. For example, involve companies in energy grid upgrades in exchange for concession rights, or get telecom firms to invest in broadband with the incentive of access to new spectrum. Philanthropic and non-profit organizations can fill gaps in areas like education and entrepreneurship support (foundations could sponsor coding in schools or small business microloans).

Crucially, Puerto Rico should study how other similarly situated regions turned around their fortunes. For instance, Hawaii has managed to partially mitigate its high energy cost through aggressive renewable adoption and has built a thriving innovation scene in astronomy and ocean sciences despite geographic isolation. Singapore (while a country, not state) overcame lack of natural resources through human capital investment and is now a tech and finance hub – its strategies in education and economic freedom hold lessons. Estonia transformed from a struggling economy to a digital leader by implementing e-government and tech education at scale. Puerto Rico can adapt relevant lessons from these cases, proving that being small or isolated need not preclude competitiveness if smart policies are adopted.

Conclusion

Puerto Rico’s current competitive position relative to U.S. states is undeniably weak – a result of structural economic flaws, underutilized human capital, and exposure to devastating climate events. The data from the past decade highlight the gaps: electricity that is costlier and less reliable, an economy more heavily regulated and dependent on external aid, far less innovation capacity, a workforce that participates at the lowest rate in the nation, and infrastructure that buckles under climate stress. These challenges have already translated into a stagnant economy and an exodus of talent. And as the world enters an AI-driven era, the risk is that Puerto Rico falls even further behind, stuck with 20th-century problems while others reap 21st-century gains.

However, the Puerto Rican people and their leaders are not passive victims of fate. With targeted, courageous reforms – many already identified in fiscal plans and expert reports – Puerto Rico can chart a new course. The policy recommendations outlined above are ambitious but achievable with collective will. They recognize Puerto Rico’s fiscal limitations by calling for smart use of federal funds and partnerships. They also acknowledge that solutions must be homegrown yet informed by global best practices.

Implementing these reforms can over time stabilize energy costs, unleash entrepreneurship, nurture innovation, activate the workforce, and fortify the island against hurricanes. The payoff would be a reinvigorated Puerto Rico that can retain its talented youth, attract investment, and offer a high quality of life – in essence, a Puerto Rico that competes head-to-head with states on merit, not just on tax gimmicks or subsidies. Achieving this will require persistent effort and likely some difficult adjustments. But the alternative – continuing on the current path – would mean a future of declining relevance and prosperity for the island.

For U.S. policymakers, helping Puerto Rico helps the nation: it would reduce federal outlays on emergency aid and social programs as Puerto Rico becomes more self-sufficient, and it would add to overall American economic strength by turning a struggling territory into a thriving node of innovation and productivity. For Puerto Ricans, it would restore pride and hope to see the island realize its potential as a vibrant, modern economy.

In sum, Puerto Rico’s competitiveness crisis is real but not irreversible. The challenges are great, yet the comparisons and case studies show that others have overcome similar issues. With data-driven strategies, political resolve, and collaboration across all sectors of society, Puerto Rico can usher in an era of renewal – one where a decade from now, we might be writing about Puerto Rico as a case study in successful turnaround, rather than perennial stagnation. The time to act is now, before the gaps widen further. Puerto Rico’s people deserve an economy as resilient and bright as their spirit, and with the right policies, they can build it.

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