PUERTO RICO'S STATUS DEBATE

Author: Amy Thornbury

CHAPTER TWO

From Shantytown to Shining Star--
An Overview of Puerto Rico's Economy


'Every man must do three things in his life:
plant a tree, write a book, and have a son. . . .
I wish [Puerto Ricans] would plant more trees
and write more books.'
--Luis Muñoz Marín, ca. 1945.

Two features are predominant in Puerto Rico's economy: (1) it has very limited natural resources (but very extensive human resources); and (2) it is highly dependent on the U. S. economy. Puerto Rico is an island of just 3,421 square miles (including the small islands of Culebra and Vieques) on which 3.2 million people reside, producing a population density of 952 inhabitants per square mile as of 1980. Only Singapore, Malaysia and Hong Kong have higher population densities. Less than two-thirds of the land is suitable for cultivation. It is not surprising, therefore, that the island is prone to very high rates of unemployment. Its population has been increasing rapidly; it nearly doubled between 1899 and 1940, rising from 953,000 to 1.87 million. With so many people and so few resources, per capita income is low. In 1970, Puerto Rico's per capita income was less than one third that of Mississippi, the poorest state in the Union. By 1980, however, it had risen to almost half that of Mississippi. Indeed, Puerto Rico boasts the highest per capita income figures in Latin America. It is crucial, however, to place Puerto Rico's economy within the proper frame of reference: with a tropical climate, no one freezes to death, no matter what their level of income. Thus an average annual per capita income of $3,910 for 1983 would be below subsistence level stateside, but not in Puerto Rico. One must keep in mind that there is one car for every three Puerto Ricans and one telephone for every four, and that three out of four own their own home, 93% of which have modern plumbing. The point is not that no one on the island suffers; only that Puerto Rico's standard of living, health, and education levels are closer to the U. S. than its per capita income would imply. Comparing per capita income of Puerto Rico and the U. S. is like comparing apples and oranges. Unfortunately, the U. S. government does not make a distinction between stateside and island poverty levels, which is why over 70% of the island's inhabitants qualify for foodstamps and almost as many for welfare by U. S. national standards. The Cost of Living Council was the only agency I found which exempted Puerto Rico from its guidelines and economic controls on minimum wages, acknowledging that "the workers are affected by economic conditions and the cost of living . . . [where] they reside." Unless corrective measures are taken, the irony will persist that Puerto Rico is a "welfare" state which suffers, not from long soup lines, but from horrendous traffic jams.
Prior to 1940, Puerto Rico was viewed as the poorhouse of the Caribbean. Economists described it as a "stagnant backward economy" and an undesirable place in which to live, visit, or invest. A lack of investment capital or natural resources and a plethora of political instability and hurricanes were some of the factors contributing to Puerto Rico's predicament. Above all, a parasitic dependency on the U. S. was a crucial factor from the beginning. By 1937, Puerto Rico was the ninth largest exporter of goods into the U. S. and the seventh largest importer of goods from the U. S. Almost 90% of Puerto Rico's trade was with the U. S. in 1942. Puerto Rico was especially hard-hit by the Great Depression of the 1930s: between 1929 and 1933, per capita income fell from $122 to $86; furthermore, it did not regain its 1930 level until 1940.
The real boost to the Puerto Rican economy was a program of investment incentives known as "Operation Bootstrap" under the program Fomento (which literally means "to stir up" or develop). Begun in 1947 under the direction of the Economic Development Administration, headed by Teodoro Moscoso, this was a massive effort to encourage U. S. investment in Puerto Rico through the incentives of full exemption from federal, state, and local taxes in a low-wage environment. The basis of Operation Bootstrap is Section 936 of the U. S. Internal Revenue Code, which grants full federal income tax exemption to branch operations of U. S. corporations that locate in Puerto Rico. Companies that take advantage of this incentive are commonly referred to in Puerto Rico as simply "936 firms." To give an indication of the extent and importance of Section 936, U. S. firms in Puerto Rico avoided an estimated $693 million in federal taxes in 1978. The offer was timed perfectly, since many U. S. manufacturers were enjoying a post-war boom and were in search of a place to invest their earnings. The results were phenomenal, as the table below shows. Between 1947 and 1965, the average rate of economic growth in Puerto Rico was 6.8%.

TABLE 2-1
The Impact of Operation Bootstrap on Puerto Rico's Economy

Year Gross Product Per Capita Income Factories
(in millions of 1954 dollars) (in current dollars)

1940 499 -- --
1950 879 297 82
1960 1,473 587 717
1968 -- 1,313 1,684
1970 2,901 1,384 2,000
1975 3,422 2,225 --
1980 4,149 2,934 --

(SOURCES: Heine and García-Passalacqua, pp. 34-5, Steiner, p. 138, and Heine, p. 102.)

Operation Bootstrap succeeded in developing Puerto Rico's economy, achieving an increase of 372% in gross product (inflation adjusted) and 888% in per capita income (not inflation adjusted) between 1950 and 1980. Puerto Rico's amazing growth became the envy of the Caribbean -- but it was not achieved without a price. Pollution is an obvious expense. The social displacement in the rapid transition from a rural society to an industrial one is another. Operation Bootstrap was the catalyst which was almost solely responsible for the transformation of Puerto Rico from an undeveloped, agricultural economy to a developed industrial one. In 1956, manufacturing contributed more to Puerto Rico's gross national product than agriculture for the first time ever, and by 1980, the roles of agriculture and manufacturing were completely reversed: in 1950, 36% of the labor force was involved in agriculture and only 9% was in manufacturing, as opposed to 5% and 20%, respectively, in 1980. The problem is that Puerto Rico has become almost completely unable to feed itself. The islanders, in effect, produce what they do not consume and consume what they do not produce. More significant is the resentment which American industrialization aroused among the islanders. U. S. companies that operate in Puerto Rico usually pay no local taxes for 12 to 17 years. If they leave the island when their tax exempt period is over, they "rob" the island in that they enjoy a free ride for the infrastructure they use.
Finally, the highest price for both Puerto Ricans and mainlanders is the level of dependency which Operation Bootstrap encouraged. Carr maintains that the program represented a point of no return in terms of Puerto Rico's dependence on the U. S. Juan M. García-Passalacqua, a political analyst in Puerto Rico today, argues that the Puerto Rican economy of the 1980s is in serious trouble due to Operation Bootstrap, which he terms "fragile, super-imposed, and artificial." To the neglect of Puerto Rico's social problems and efforts to establish self-sufficiency, the program transformed Puerto Rico into "an artificial economy, totally dependent on decisions made by private entrepreneurs in the United States. . . . The present crisis is due to the collapse of that model." The crisis, he explains, is that the program "has ceased to significantly increase employment; it does not direct higher income into the pockets of the masses in Puerto Rico; and social signs of disintegration have become widespread." Included in the "social signs of disintegration" are a high juvenile crime rate, drug abuse, the disintegration of the Puerto Rican family, and the fact that, by 1979, just five years after the program was extended to the island, food stamps were reported by the Wall Street Journal to be almost as common as money; they were a second currency in Puerto Rico. Heine and García-Passalacqua point out the grave implications of this situation:

When a majority of the population receives food stamps, any stigma associated with
receiving a government handout is soon erased. Moreover, the incentives for not
working are strengthened by a reward structure in which the differential between
the monthly wage for unskilled labor and unemployment compensation-plus-food-
stamps is much lower than in the United States. Furthermore, transfer payments
contribute little toward Puerto Rico's long-term economic development needs,
and a large amount of consumer spending goes for imported goods and finds its way
right off the island.
As one economist summarized the dangers of Puerto Rico's mass dependency on the U. S., "The cost, of course, is to turn Puerto Rico permanently and irreversiby into a South Bronx." This author maintains, as do many Puerto Ricoans, that statehood would virtually guarantee this outcome, although no one can know for sure.


TABLE 2-2

Unemployment and Population in Puerto Rico, 1955-1980

1955 1960 1965 1970 1975 1980

Total
Population 2,250* 2,340 2,564 2,710 3,075 3,390*

% over age 14
Unemployed 13.2 13.2 11.2 10.3 15.4 18.0*

(Source: Heine, p. 193) *estimated


Clearly, a primary goal of the island, no matter what its status, must be to develop self-sufficiency, although some would argue that Puerto Rico's dependency is essentially a question of status: that is, assimilation whether in Commonwealth or statehood can only promote dependency, while severing the political ties through independence or quasi-independence is the only path to self-sufficiency. The Tobin Committee of 1975, led by Yale economist James Tobin, studied Puerto Rico's finances and concluded that Puerto Rico's economic crisis was not the result of external economic conditions but of "systematic factors" stemming from the island's dependent, subservient status. Yet where would Puerto Rico be without economic aid from the U. S.? Many believe that the island would perish. Muñoz summarized the situation well in 1946:

Let us understand that political freedom which flaunts immutable economic realities,
must perish in the holocaust which consumes all unsupported economic structures,
and that those who think of liberty as something isolated from economic reality will reap
nothing but tragedy for our country. . . .
[By 1960], Puerto Rico's . . . inhabitants . . . must be able to live off domestic production
and dispense with artificial aids. . . . If Puerto Rico fails to attain this goal by 1960 -- then
Puerto Rico is lost. The people of Puerto Rico and their civilization will vanish in a
brief and luminous blaze in the mists of time.
Puerto Rico did not achieve the goals Muñoz spoke of by 1960, nor have they been achieved since. What keeps Puerto Rico from "vanishing in a brief and luminous blaze" is the record $6.5 billion dollars -- roughly 30% of the island's gross domestic product -- which Puerto Rico will receive from the U. S. this fiscal year. In spite of all the complaints against "U. S. exploitation" of the island, the weight of evidence in the U. S.-Puerto Rico economic relationship suggests that the benefits of Puerto Rico's association with the U. S. greatly exceed the costs. As one observer explains, 'industries from the states did not come to the island as colonial exploiters. We begged and beseeched and cajoled industry to come. Sure we offered them high tax advantages and high profits and low wages. So what? They rescued the island. Does life-saving have a price?' In this sense, then, it has been suggested that transfer payments to Puerto Rico compensate for the corporate profits and consumer dollars which find their way off the island.
In summary, Puerto Rico's economy has improved tremendously since the turn of the century, at least superficially. Deeper problems persist, however, of which high rates of unemployment (see Table 2-2) and dependence on U. S. transfer payments instead of Puerto Rican productivity are symptoms. These problems include Puerto Rico's addiction to consumption and lack of saving and investment, the lack of interindustry or inter-island economic connections, and other factors which reduce Puerto Rico's chances for attaining a greater degree of self-sufficiency. The root of these problems can be partly attributed to the island's status vis à vis the U. S., according to the Tobin Study mentioned previously. Thus, a change in the island's political relationship with the U. S. would also change the degree of economic dependency which has afflicted Puerto Rico for the past forty years.



1 Cited in Stan Steiner,The Islands: The Worlds of the Puerto Ricans, New York: Harper & Row, 1974, p. 140.

Grupo de Investigadores Puertorriqueños, p. 1476.

William Stead, Fomento: The Economic Development of Puerto Rico (Washington, D. C.: National Planning Association, 1958), p. 7. This figure has been gradually increasing since the turn of the century.

Heine and Garcia-Passalacqua, pp. 32-33. Some Puerto Ricans with whom I spoke claimed that it is common on the island for low income individuals to collect food stamps and social security under two or more false social security numbers, permitting them to enjoy a higher standard of living.

The Wall Street Journal (WSJ), December 13, 1971, 2:4.

Werner Baer, The Puerto Rican Economy and Unitesd States Economic Fluctuations, Rio Piedras: Social Science Research Center, University of Puerto Rico, 1965, p. 9.

The strong link between the U. S. and Puerto Rico's economy is explored by ibid. For statistics, see Earle K. James, "Puerto Rico at the Crossroads," Foreign Policy Reports 13 (October 15, 1937): 182.

WSJ, July 5, 1978, 1: 5.

Statistics and figures given by Heine and García-Passalacqua, pp. 34-35.

Carr, p. 231. Some efforts are being made to revitalize Puerto Rico's agricultural sector at present, however, as in the efforts to establish experimental high-yield banana and fish farms in the eastern part of the island.

See ibid., pp. 223-24.

All above citations from Juan M. García-Passalacqua, Puerto Rican Equality and Freedom at Issue (New York: Praeger, 1984), pp. 78-79, p. 89.

WSJ, March 28, 1979, 22:1.

Heine and García-Passalacqua, p. 41.

See José J. Villamil's chapter, "Puerto Rico 1948-1978: The Limits of Dependent
Growth" in Heine, p. 111.

See Berríos, p. 571.

Muñoz's speech is cited in William Dovillier's column, "A Bit of P. R.'s Reality," STAR, January 10, 1988, 35.

Ruth Gruber's May 12, 1972 New York Times Magazine article is cited in Carr, p. 212.