Despite its strong economic growth in recent years, Latin America continues to be a challenging region in which to be an entrepreneur. Difficulty in navigating complex bureaucratic regulations, a lack of infrastructure, and a large informal sector can be formidable obstacles to starting one’s own business. Furthermore, cultural factors, such as a risk-averse mentality, lack of familiarity with the concept of “entrepreneurship,” and perceptions of the government as the main source of jobs have also posed significant difficulties to entrepreneurship in the region.
In the face of these daunting challenges, entrepreneurship initiatives have sprung up across Latin America and the Caribbean in recent years in an effort to educate youth about the importance and benefits of free enterprise for democratic and economic development. Countries such as Chile, Brazil, Peru, and Ecuador have adopted programs to educate youth about entrepreneurship and prepare them for running a business, with positive results. Now, one such initiative has arrived in an unexpected place: Puerto Rico.
In many ways, Puerto Rico is a bridge between the United States and Latin America. While the island is a self-governing U.S. commonwealth and its inhabitants possess U.S. citizenship, its language, culture, and geography link Puerto Rico to Latin America and the Caribbean. Indeed, Puerto Rican entrepreneurs and small business owners often face many of the same obstacles that their counterparts throughout Latin America must confront.
As in many Latin American countries, the concept of “entrepreneurship” is not widely understood, and many risk-averse Puerto Ricans are reticent to start their own businesses for fear of failure. Would-be women entrepreneurs in Puerto Rico face an additional obstacle: a culture rooted in machismo, or male-dominance, and the notion that running a business is not a suitable job for a “decent” woman. Additionally, while in 2014 Puerto Rico ranked #40 out of 189 countries in the Doing Business Index, a large informal economy persists on the island.
As with many Latin American and Caribbean nations, Puerto Rico is currently facing a “brain drain” of young, educated professionals who, due to a prolonged recession and rising insecurity, have chosen to leave the island in search of a better future in the mainland United States, Spain, the Dominican Republic, and other countries.
Indeed, there are currently more Puerto Ricans living on the U.S. mainland (4.9 million in 2012) than in Puerto Rico itself (3.6 million in 2013). Since 2010, approximately 144,000 Puerto Ricans have left the island for the mainland U.S., a figure which dwarfs the number of islanders who left for the mainland between 1970 and 2000. A large number of college graduates have joined this exodus, attracted by higher wages, more job opportunities, and lower levels of violence on the U.S. mainland.
In response to the island’s economic woes, last month Governor Alejandro García Padilla announced plans to implement a local version of Start-Up Chile, a program that seeks to generate a culture that rewards entrepreneurship and innovation by helping start-ups with financing and investment. Start-Up Chile participants are working to create a culture that promotes entrepreneurship and development, and the program has been replicated throughout Latin America and beyond.
In addition to providing government support for a Puerto Rican version of the program, García Padilla approved a law that exempts youth between the ages of 16 and 26 from paying income taxes on the first $60,000 that they make through their own startup company. The law provides young entrepreneurs with additional incentives in the form of tax exemptions on obtaining patents, office space, and supplies for their startup.
This turn toward encouraging small businesses and young entrepreneurs to stimulate economic growth represents a radical departure from the development strategies that the Puerto Rican government has traditionally used. Beginning in the 1960s, Puerto Rico focused on attracting large U.S. companies, particularly pharmaceuticals, to the island through incentives such as tax breaks, the most notable of which was Section 936 of the IRS Code. Through Section 936, U.S.-based manufacturers were able to send all profits from Puerto Rican plants to parent plants in the United States mainland without having to pay any federal taxes.
However, Section 936 was phased out by 2006, creating disastrous effects for Puerto Rico’s economy and ushering in eight consecutive years of negative GDP growth. Through the new laws that incentivize the creation of small businesses and youth entrepreneurship, Puerto Rico’s government is seeking to harness the intellectual capacity of its population and take advantage of the island’s location at the political, economic, and cultural crossroads between the United States and Latin America. Puerto Rico’s literacy and college attendance rates are among the highest in Latin America and the Caribbean, and nearly 35 percent of the island’s population is under the age of 35. Moreover, Puerto Rico has the potential to become an important nexus in commerce between the United States and Latin American and Caribbean nations due to its unique status as a U.S. commonwealth with a Latin American culture and legal codes similar to those used in many Latin American countries.
The Puerto Rican government’s official support for entrepreneurship programs is vital in changing perceptions toward the importance of entrepreneurship among Puerto Ricans. Financial incentives to islanders who start their own businesses can lower some of the risk that many Puerto Ricans associate with opening a business. Even the large population of young Puerto Ricans who have established themselves in the U.S. mainland can be another potential source of optimism. If members of the diaspora were to one day return to Puerto Rico, they could inject the island with a fresh dose of technical know-how and a different perspective of entrepreneurship.
In any case, it is a positive development that the government, the primary institution to which Puerto Ricans look for economic wellbeing, has recognized the importance of small businesses and entrepreneurship to the island’s development. Puerto Rico’s economic woes are complex, yet giving entrepreneurs and small businesses more room to grow and contribute is a necessary first step to economic recovery.
The success that entrepreneurship programs geared toward youth have had in other parts of Latin America has not gone unnoticed in Puerto Rico. Despite the economic and cultural challenges to entrepreneurship in the region, many Latin American countries have made important strides in encouraging entrepreneurship among youth. This bodes well for similar initiatives in Puerto Rico, and if these programs meet with success on the island, perhaps other Latin American countries that have not yet taken steps to promote youth entrepreneurship will start to do so.
Kevin Gatter is a Program Assistant for Latin America & the Caribbean at CIPE.