Online Appendix – Supplementary Material

ONLINE APPENDIX – SUPPLEMENTARY MATERIAL

Development and Decay: Political Organization, Economic Conditions, and Municipal Corruption in Puerto Rico, 1952-2015

Gustavo J. Bobonis1, Luis Raúl Cámara Fuertes2, Harold J. Toro3, and Julie Wilson4

January 2021

1 Professor, Department of Economics, University of Toronto, BREAD, and J-PAL. Address: 150 St. George St., Toronto, Ontario, M5S 3G7, Canada. Tel: 416-946-5299. Fax: 416-978-6713. E-mail: [email protected]. 2 Professor, Department of Political Science, University of Puerto Rico-Río Piedras. Address: P.O. Box 23445, University of Puerto Rico, Río Piedras Campus, San Juan, PR 00931, USA. Tel: 787-764-0000, ext. 4332. E-mail: [email protected] 3 Teaching Professor, Keough School of Global Affairs, University of Notre Dame. E-mail: [email protected]. 4 MA, Department of Economics, University of Toronto. E-mail: [email protected]. 1

Appendix A: Context The Report of the Military Governor of Puerto Rico on Civil Affairs (1902) highlights issues and lacking fiscal and organizational capacity at the municipal level:

“The municipal authorities could not collect taxes that were due, and the income counted on by approved budgets could not be realized. Police, school-teachers, and employees generally were unpaid, and civil hospitals that had to not been wrecked by the storm were closed or unable to receive the deserving applicants who thronged to them. An approved budget, regularly formed, became only some sheets of paper, and really meant nothing more than the town needed such and such amounts to administer its affairs. Those taxpayers who could pay often had no confidence in the honesty of the officials and so would find pretexts for refusing payment, and such proprietors usually had enough influence with the courts to prevent the collection being enforced by judicial procedure.” (p. 43)

Colonial officials linked these forms of misgovernance to various practices of corruption and capture of local affairs – due to the informal rules of conduct of local officials in ways that persisted from the Spanish regime:

“In some, indeed in many, towns the administration was most vicious, and frauds and peculations were common, admitted by all; yet the law provided severe penalties for officials aiding or permitting, or who did not prevent, fraud and malversations. The treasury or depositary of Caguas turned over his duties to his successor early in 1899. His books showed a large balance of cash on hand; yet, though the chest was empty, no proceedings were taken to enforce restitution. The bond of fidelity taken was worthless, and there was no way to recover the funds stolen. The members of the council who were in office when this occurred were personally responsible, yet they were not held to an accountability.” (p. 41)

Similarly:

“It was found that in practice the alcalde and a few of his friends dominated everything, the others absenting themselves from the sessions, or took no interest. This was probably as it was intended to be. There was not much improvement in procedure and administration after the newly elected councils were installed. It seemed to be impossible to break away from the old practice. The alcalde still continued to be the dominating power, as he was always of the party holding a majority representation. The tendency was for the

minority to be absent or decline to vote—this notwithstanding the fact that the rules of procedure enacted heavy penalties for illegal or unnecessary absence.” (pp. 42-43)

The U.S. colonial powers implemented tutelage rule under both the Foraker Act of 1900 and Jones Act of 1917 and centralized decision-making regarding municipal affairs, with the stated objective of “educating the natives in self-government” by always retaining important functions in “continental” hands (Clark 1972). According to Clark (1972):

“[m]unicipal autonomy under the Jones Act of 1917 was severely restricted: a clause in the law established the requirement for authorization by the U.S. President for funds to be used in any way other than the purpose for which they were originally appropriated (U.S. Statutes at Large, XXXIX, 952). This restriction was interpreted by colonial officials to apply not only to the insular government but also to the municipalities as well.” (p. 228)

U.S. colonial officials claimed that poor local governance was mainly the result of practices found following the regime change. The Report of the Military Governor of Puerto Rico on Civil Affairs (1902) remarks:

“[i]t is not surprising that honest and efficient municipal government should not exist; in fact, it would have been a miracle if, with all the constraints and inspections to which the local authorities were continuously subjected, good administration had ever been found. The miracle did not supervene, and the type of municipal government found by Americans was but another name for misrule.” (p. 39) The report also attributes patterns of misgovernance to intrinsic attributes of the Puerto Rican’s ethnicity: “It is a melancholy reflection that there is no instance when the Spanish race, through an honest exercise of the elective franchise, has been able to establish and maintain such a government.” (p. 45).

Clark (1972) argues that this lack of autonomy led local and insular-level officeholders to prioritize patronage over programmatic politics, a strategy crucial for electoral success throughout the period:

“[i]f the important functions of government (finances, public education, law and order, and long-range status) were thus removed from Puerto Rican control […], what remained for the native politicians? The very real limits upon their governmental participation made it tempting and easy for them to see politics as simply contests for the spoils of patronage. Without opportunity to make their political activity true statecraft, is it any

wonder Puerto Ricans were carrying on the "mere politics" denounced in 1940 by Luis Muñoz Marín?” (p. 233)

These historical debates thus highlight the need to understand the political and electoral environment throughout our period of analysis as we argue it plays a fundamental role in explaining corruption patterns.

Appendix B: Description of Data Categories Used in Section 4.1 Figure 2: Panel A presents the average number of violations as well as those attributed to the top municipal officials (i.e., mayor or vice-mayor) throughout the period. Panel B shows the average level of reported findings and compares them to the share of those violations that was referred to the DoJ. In both panels, the measure of corruption represents violations per number of reports issued for a municipality in each term. For purposes of framing historical episodes, we include marker lines for each Comptroller’s term in office and for each governor’s terms in office in Panels A and B, respectively.

Figure 2: Average Number of Corrupt Violations by Electoral Term Panel A: All violations and violations by Panel B: All violations and violations referred mayor/vice mayor to PR Department of Justice (with marker lines for Comptroller terms) (with marker lines for Gubernatorial terms)

Note for Panels A and B: These figures represent the average number of violations per report in each electoral term. *Three reports from 1952 are included in the data for the 1953-1956 electoral term. **The latest publication year of reports in our dataset is 2015, and our data therefore does not include all reports in the 2013-2016 electoral term. Notes for Panel A: The dashed vertical lines reflect Comptroller terms as follows: (1) Dr. Rafael de J. Cordero Orta: July 1952 – May 1961; (2) Justo Nieves Torres, CPA: July 1961 – May 1971; (3) Lcdo. Basilio Santiago Romero: September 1971 – August 1977; (4) Félix L. Salgado Torres: August 1977 – January 1978; (5) Ramón Rivera Marrero, CPA: February 1978 – September 1986; (6) Luis M. Malpica Rodríguez, CFE: October 1986 – September 1987 (Interim appointment by the Governor); (7) Lcda. Ileana M.Colón Carlo, CPA, CFE: October 1987 – September 1997; (8) Sr. Manuel Díaz Saldaña: October 1997 – June 2010; (9) Hon. Yesmín M. Valdivieso: July 2010 – present. Notes for Panel B: The dashed vertical lines reflect Gubernatorial incumbents as follows: (1) Luis Muñoz Marín: 1949 – 1964; (2) Rafael Sánchez Vilella: 1965 – 1968; (3) Luis Ferré: 1969 – 1972; (4) Rafael Hernández Colón: 1973 – 1976; (5) Carlos Romero Barceló: 1977 – 1984; (6) Rafael Hernández Colón: 1985 – 1992; (7) Pedro Roselló: 1993 – 2000; (8) Sila M. Calderón: 2001 – 2004; (8) Aníbal Acevedo Vilá: 2005 – 2008; (9) Luis Fortuño Burset: 2009 – 2012; (10) Alejandro García Padilla: 2013 – 2016.

Figure 3: The figure documents time trends by type of violation identified in the municipal audits by municipal government activity classification. The notes to the figure in the appendix provide details of the types of findings in each category.

Figure 3: Average Number of Corrupt Violations per Report, by Electoral Term and Class of Government Activity

Contracts & Disbursements: issues with change orders; illegal contracting – with and without required auctions; issues with licensing or titling/ownership; illegal payments (e.g. payments to non-employees); faulty contracts; absence of or late contracts or purchase orders. Human Resources: illegal hiring, including nepotism and patronage; human resources mismanagement (e.g. sexual harassment suits); discriminatory layoffs/demotions (political discrimination); ghost/phantom employees. Controls & Regulations: Faulty controls (e.g. poor inventory management); no/poor regulation; no/late submission to OCPR; lack of supervision of donations to private groups or individuals. Other: enforcement of payments to government includes (non-payment of taxes or project insurance; illegal appropriation of municipal taxes); accounting and finance (accounting and financial mismanagement; missing budget credits, unnecessary and extravagant expenses); boards and assemblies (auction board mismanagement; municipal assembly mismanagement); theft/extortion (equipment and money theft); use of funds to improve the mayor’s image. *Three reports from 1952 are included in the data for the 1953-1956 electoral term. **The latest publication year of reports in our dataset is 2015, and our data therefore does not include all reports in the 2013-2016 electoral term.

Figure 4: shows time-trends in corrupt behavior by classification of government activity. The notes to the figure in the appendix provide details of the types of findings in each category.

Figure 4: Average Number of Corrupt Violations per Report, by Electoral Term and Area Classification

Notes: Construction includes: permanent works and improvements, sports and recreation, water, rental properties, transportation, industrial, professional services and consulting, and general construction. Municipal Affairs includes: municipal taxes, human resources, professional services and consulting, vehicles and garages, Auction Board, Municipal Assembly, Automated Uniform Accounting System, funds/investments, and legal. Property, Equipment, G&S (Goods and Services) includes: property and equipment purchase/rental and goods and services. Other includes: health, education, telecommunications, advertising, transfers to groups and individuals, law enforcement, solid waste management, and other maintenance services. *Three reports from 1952 are included in the data for the 1953-1956 electoral term. **The latest publication year of reports in our dataset is 2015, and our data therefore does not include all reports in the 2013-2016 electoral term.

Appendix C: Additional Results Federal Government Transfers to Puerto Rico We partially confirm the greater influx in federal transfers based on aggregate data from the Puerto Rico System of National Accounts for the period 1971-2015 (see Appendix Figure A1). We report gross federal transfers to Puerto Rico (in real terms, deflated using the Puerto Rico Consumer Price Index), both in overall terms and for transfer categories that involve intermediation by the state or municipal governments. There is a substantial rise in these transfers in the late 1970s that rises in proportional terms in the ensuing decades.

Figure A1: Gross Real Federal Transfers to Puerto Rico, 1971-2015

Note: the above graph includes federal transfers data from 1971 to 2015, and therefore does not include all data from the 1969-1972 (*) and 2013-2016 (**) electoral terms.

Corrupt Violations, by Electoral Term and Incumbent Party at Municipal Level We show analogous figures of the average level of reported violations over time, grouped by electoral term and segmented by the political affiliation of the municipality’s mayor – for incumbents of the PNP and PPD (see Appendix Figures A2, Panels A and B ). We report both the average number of violations as well as those attributed to the top municipal officials (i.e., mayor or vice-mayor) throughout the period. We report trends for the period 1977-80 onwards as we only have access to official electoral records and incumbent mayor characteristics for this period onwards.

Figure A2: Average Number of Corrupt Violations per Report, by Electoral Term and Incumbent Party at Municipal Level Panel A: PNP Incumbent Mayor Panel B: PPD Incumbent Mayor

Note: These figures represent the average number of violations per report in each electoral term. *The latest publication year of reports in our dataset is 2015, and our data therefore does not include all reports in the 2013-2016 electoral term.

Across most electoral terms, PNP-controlled municipalities show a greater average level of findings of corruption per report than PPD-controlled municipalities. Although both groups exhibit a rise in corruption throughout the 1977-2000 period, the average level is generally greater for PNP- controlled local governments. For example, the average number of violations for these municipal governments is 3.2 throughout this period. In contrast, the corresponding level for PPD-controlled ones was 2.4 findings per report, a difference of 0.8 findings per report. Based on the simple comparison of these differences, PNP-controlled municipalities exhibit 33 percent higher corruption levels in proportional terms than PPD-controlled ones. The pattern is less stark during the subsequent 15-year period covering the first decade and a half of the 21st century, but PNP-led municipalities still exhibit a higher number of corrupt violations than those led by PPD-affiliated mayors. Again, the average number of violations for PNP and PPD-controlled municipal governments throughout the 2001-15 period is respectively 2.3 and 1.8, a difference of 0.5 findings per report or 28 percent in proportional terms. The number of findings that are attributed to top municipal officials also appear to be greater in PNP-controlled municipal governments than in PPD-controlled ones. During the 1977-2000 period, mayors and vice-mayors in PNP municipalities were reported to have 1.3 violations on average vis-à-vis 1.0 violations for municipal leaders affiliated with the PPD. The fact that corruption is greater in PNP-controlled municipal governments does not imply that representatives of the pro-statehood party are more corrupt; it is plausible that other factors

9 distinguish PNP and PPD-controlled municipalities. For instance, it may be the case that municipal governments under the control of a party relative to the other may be larger in terms of their population, or may have access to more resources, both structural conditions which might generate (greater or weaker) incentives for political elites to engage in corruption. Additionally, the PNP has more municipalities under its administration during the period of economic growth in the latter part of the twentieth century.

Relationship with Municipal Population Levels and Municipal Government Budgets Turning to the relationship between size of the municipality and corruption, there are competing reasons as to why we would observe higher or lower levels of corruption in larger municipalities. First, larger municipalities tend to have more resources: this may create greater opportunities for corruption, and for the establishment of spoils and patronage systems. On the other hand, larger municipalities may have more highly trained civil servants, better administrative organizations, and stronger anti-corruption control systems in place (e.g., Jiménez, Villoria, and García Quesada 2012). For example, the federal government may demand the implementation of more complex auditing and monitoring measures for larger municipalities than for smaller ones when allocating transfers. Although smaller municipalities may have fewer resources to enable opportunities for corruption, they might harbor institutional or social factors that favor it. While governments from smaller municipalities may have better access to local information and accountability pressures, they may be more vulnerable to capture by local elites who can disproportionately benefit from control of local municipal affairs (Bardhan 2002). It is also plausible that societal groups in smaller vis-a-vis larger municipalities experience different forms of social capital (Banfield 1958; Putnam 1993; 2000). Bonding social capital, which is characterized by social interactions of tight knit, homogeneous groups, tends to favor in-group favoritism and norms of reciprocity. Bridging capital, on the other hand, is based on shared values and beliefs that foster broad cooperation.; this type of social capital is more common in larger more heterogeneous communities that have links to other communities. To the extent that the former type of social capital is stronger in smaller, more homogeneous municipalities, it may enable corruption or create social pressures not to hold individuals accountable for it.5

5 In both cross-country studies and case studies in distinct contexts, bridging capital is associated with lower levels of corruption and a greater degree of political accountability (e.g., Nannicini et al. 2013; Wachs et. Al. 2019) whereas bonding

Figure A3: Relationship between Municipal Population Levels and Corruption, 1952-2015 All Corrupt Violations Violations by the Mayor/Vice-Mayor

To empirically understand these underlying forces, we examine the relationship between municipal population size and reported levels of corruption throughout this long-term period. Appendix Figure A3 displays four graphs showing corruption levels in two periods—1952 to 1989 and 1990 to 2015—and the same sets of outcomes shown earlier—all corruption-related violations per report, and those attributed to the political leadership. We stratify the sample across these time periods because we only have comparable municipal budget data for the fiscal year 1991-92 onwards and we aim to understand this relationship for a common time period. Finally, note that population

social capital is associated with greater levels of corruption (Harris 2007; Wachs et. Al. 2019) and clientelism (Anderson, Francois, and Kotwal 2015). 11 levels serve as a proxy measure for a municipality’s aggregate prosperity, since there are no measures of municipality-level income per capita which vary across electoral terms for this 64-year period. We document a positive but statistically insignificant association between the municipal population size and corruption in overall terms during the period 1952 to 1989: the linear relationship based on a regression model that includes time trend controls implies that municipalities with 100,000 more inhabitants had governments with 0.65 more corrupt findings per report (standard error = 0.42; p-value = 0.13). The analogous relationship for findings attributable to the municipal leadership also suggests a positive, insignificant association: 0.050 more corrupt findings per report (standard error = 0.063). For the more recent 1990-2015 period, the pattern reverses; there is a moderately negative and marginally significant relationship between a municipality’s population size and corrupt findings6, but a strong negative relationship with findings attributable to the municipality’s leadership. The linear relationship implies that municipalities with 100,000 larger populations exhibit 0.17 fewer findings of corruption per report (standard error = 0.027; p-value<0.001), a 21 percent decrease in proportional terms. This suggests there may be distinct incentives for engagement in political as opposed to bureaucratic corruption in this setting.7 We also explore the relationship between a municipality’s budget in real terms (indexed to 1992 dollars)8 and corruption levels directly using data for the 1991-2015 period (see Appendix Figure A4). We document a modest, negative relationship between municipal budgets and resources and corruption levels in overall terms: the linear relationship based on a regression model that includes fiscal year controls implies that municipalities with $100 million larger budgets had governments with 0.211 fewer corrupt findings per report (standard error = 0.065; p-value = 0.002), a 8.5 percent reduction in proportional terms (Panel A). We find an even stronger relationship when focusing on the relationship with findings attributed to the top leadership; the analogous linear relationship implies 0.30 fewer findings per report (standard error = 0.065; p-value < 0.001) (Panel B). This represents 36 percent lower levels of corruption in proportional terms.

6 The point estimate implies that municipalities with larger populations, 100,000 more inhabitants, exhibit 0.09 fewer corrupt findings during the 1990-2015 period (standard error = 0.051, p-value = 0.084). 7 Bureaucratic corruption by rank-and-file municipal employees may have more to do with individual enrichment and be less related to efforts for political gain and may be carried out without the mayor’s knowledge or consent. The mayor or vice-mayor, on the other hand, have direct control over many aspects of municipal affairs, can establish large, complex graft schemes unlikely among lower-level employees, and are more likely to use municipal resources for political motives. 8 We deflate municipal budget data using PR’s inflation rates (average consumer prices) reported in the IMF World Economic Outlook (October 2020) Database. 12

Figure A4: Real Municipal Government Budgets and Corruption, 1991-2015 Panel A: All Corrupt Violations Panel B: Violations by the Mayor/Vice-Mayor

Note: Our data includes municipal budget data for the 1991-1992 fiscal year to the 2015-16 fiscal year; however, report data only extends until 2015. Municipal budget size is normalized to be in 1992 dollars.

Summarizing this empirical exercise, we show that while not irrelevant, economic and demographic changes have a weak relationship with municipal-level corruption trends in our context. These findings contrast with views that emphasize the role of local or aggregate growth patterns or increasing economic complexity in influencing corruption levels.

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