You are on page 1of 358

UNITEO STATES OEPARTMENT OF COMMERCE

The Assistant Secretary for Policy


Washington, D.C. 20230

Dear Mr. President:

Following your meeting on March 2, 1977, with Governor Romero


Barcelo of the Cornmonwealth of Puerto Rico, youdirected
former Secretary Juanita Kreps to coordinate an Executive
Branch study of the Puerto Rican economy. An interagency
group, organized at Secretary Kreps' invitation, took up this
task. At Secretary Kreps' request, 1 provided overall policy
guidance for the work of the interagency group. Many Federal
agencies worked together to complete the study. 1 now take
pleasure in submitting it to you.

The study that we have produced is broad in scope, covering


the Puerto Rican economy as a whole, the major sector s of the
economy, social conditions that relate to development, and
the role of Federal programs. Options are presented to deal
with the problems and issues raised in the study. The major
options involve alternatives to aid Puerto Rico in its
consideration of the economic priorities and goals it may set
and its approach to continued development. The study is the
most comprehensive review and analysis of the Puerto Rican
economy ever attempted. 1 am confident that it will serve
effectively its essential purpose as a basic source of
information and perspective for policy development by Puerto
Rico for several years.

Participating agencies carried out thoroughly the investiga-


tions and analyses for which they were responsible. The
study represents the sustained efforts of many persons in the
Federal Government. Policy officials in all the agencies took
a direct interest. These officials were in close touch with
Puerto Rican Government Departments throughout the study, and
it owes much to their fine cooperationin furnishing needed
information and data. Puerto Ricans both within and outside
the Government offered many helpful suggestions.

One of the valuable benefits of the work in the study has been
a significant increase in contacts between Federal and Puerto
Rican Government qfficials at' all levels. This has established
a strong, personally invested base of understanding and
cooperation that should continue. Not only the study findings
-2-

themselves but the experience gained in the project should


prove of great value to all the Federal agencies administering
programs and policies affecting Puerto Rico.

Respectively,

The President
The White House
Washington, D.C. 20500
onolllic dy
o
VolumeI
Report to the President
prepared by the Interagency Task Force
coordinated by the United States
Department of Commerce.

United States Deparlment of Commerce


December 1979
For sale by the Superintendent of Documents, U .S. Government Printing Office
Washington, D.C. 20402 (per set)

Stock Number 003-009-00328-8


I
Preface
The Economic Study of Puerto Rico originated in a meeting on March 2,
1977, between Presiden! Jimmy Carter and Governor Carlos Romero-Barcelo of
the Commonweal!h of Puerto Rico. In considering the economic situation of Puerto
Rico, Presiden! Carter suggested in the meeting, and Governor RO'mero agreed,
that a group of executive branch officials from appropriate departments be
formed to carry out a Federal study of the economic problems facing PuertO' Rico.
President Carter subsequently asked Secretary of Commerce J uanita M. Kreps
to oversee the Federal Study Group and coordinate its work. While retaining !he
responsibility for overaIl guidance of the Study, the Secretary assigned policy
management to Jerry J. Jasinowski, the Assistant Secretary of Commerce for
Policy. Mr. J asinowski convened Assistant Secretary-Ievel representatives of lhe
. departments to be involved on March 24, 1977, to take up the beginning work
of the project, and the representatives formed the Interagency Study Group (ISG).
A Federal Study Director was named to prepare the design of the Study, set out
a schedule of work, and manage the operations of an interagency working group.
The ISG met on several occasions in the spring of 1977 to decide on the focus
and bounds of the Study, its approach and topic coverage, and the responsibilities
of individual agencies.
From the outset, the ISG fel! that it was most important for the Study to avoid
political questions. In accordance with this decision, the Stndy does not examine
the economic implications of a change in Puerto Rico's po!itical status. Nor does
it reach any issues or contain any analysis which concerns a change in Puerto Rico's
political status directly.
The ISG agreed that the elfort should be confined to economic problems, with
an emphasis on the impact of Federal programs on these problems. Furthermore,
the primary view of the ISG was that the Study should be thoroughly compre-
hensive in its review and analysis of the Puerto Rican economy. These decisions
were taken in the spirit that the prevailing analysis should recognize fuIly the
broad spectrum of interests of residents of Puerto Rico. The ISG also fel! that
the setting of priorities and policies for continued economic progress is the pre-
rogative of Puerto Rican residents. This view 10gicaIly precluded the development
from the problems analysis of a set of recommendations or priorities which would
constitute, in sorne sense, an economic plan or projection for the future of the
island. The purpose intended for the Study by the ISG is that it serve as a
basic source of information and perspective for policy development by Puerto Rico
over the next several years.
In place of recommendations, the ISG considered it appropriate that the Study
propose a series of economic policy options and approaches which Puerlo Rican
policymakers could draw upon in !ine with priorities established for the economy.
The options introduced throughout the Study involve broad choices with respect
to basic policy thrust, as weIl as detailed programmatic changes. Federal Govern-
ment options are also incIuded, but these are necessarily confined lo possibilities
perrnitted under prevai!ing Federal legislation. With respect, however, to sorne
prograrns of lhe Department of Heal!h, Education, and Welfare, there are rnen-
tioned legislative proposals which have been under consideration in !he executive
or legislative branches in recent years.

i
To maintain effective coverage and manageability, the ISO prelerred to orga-
nize the Study principally on a sectoral basis. In this way participating executive
branch agencies could bring to bear their expertise on areas that generally corre-
sponded to their lormal responsibilities and at the same time cover majar problem
areas delineated lar the Study.
Alter setting this course al action, the ISO arranged a meeting with Puerto
Rican Oovernment officals to go over the general lines 01 the approach to be used
in the Study and the Study's limits and canten!. The meeting was held in Washing-
ton on May 17, 1977. The Puerto Rican Oovernment group was headed by Mr.
Miguel Rivera-Rios, President of the Puerto Rico Planning Board. The group
agreed to the ISO general plans and offered to prepare background materials to
help get the Study underway. Under the coordination oí Mr. Rivera-Rios, a Puerto
Rican counterpart committee to the ISO soon thereafter completed a detailed
agenda of Puerto Rico's problems. The agenda provided a valuable basis of
departure for the Federal agencies involved in the Study. On June 24, 1977,
foIlowing agreement within the ISO as to the final design and content al the
Study, work was begun. In the remainder oí 1977 extensive field wark and research
were undertaken by the ISO agencies.
After the initial phases of the project were underway, Deputy Assistant Secre-
tary of Commerce S. Stanley Katz and the Study Director met with Cabinet-Ievel
officials al the Puerto Rican Oovernment in San Juan on November 18, 1977.
A review oí the Study's approach, limits, content, and organization was made
for the Puerto Rican officials and a progress repor! on work to date was presented.
Detailed outlines oí all parts of the Study were tabled and requests were made
to the Puerto Rican Oovernment for special data that were needed for the planned
analysis.
Preliminary drafts al the sections oí the Study were finished by the ISO agen-
cies in early 1978. The Department of Commerce reviewed them and made appro-
priate suggestions for changes to produce a complete and well coordinated final
produc!. In arder to facilitate the process of coordination, a series of ISO meetings
was held in the spring of 1978. The ISO examined Study results, inc1uding the
findings of the overall economic assesssment produced by the Office of the Chief
Economist for the Department of Commerce. The ISO agreed on the major
problems and issues revealed in the analysis of the aggregate economy and on
the options set out in the Study. Following this series of meetings, steps were
taken among ISO agencies to assure the final interagency coordination of all
aspects 01 the Study.
Drafts of the assigned Study sections were completed by the agencies in the
fall of 1978 and a draft of the complete Study was provided to the Puerto Rican
Oovernment for review on October 30, 1978. The Puerto Rican Oovernment
conducted an examination of the Study and made the final results of its review
available on March 20, 1979. The review produced suggestions, c1arifications,
and data refinements which the ISO felt contributed materially to the accuracy,
soundness, and c1arity of the Study.
Deputy Assistant Secretary of Commerce Frederick T. Knickerbocker and the
Study Director led a delegation of ISO representatives to San Juan and held
meetings in the Puerto Rico Planning Board during the first week of May 1979,
with Mr. Rivera-Rios and other Puerto Rican policy officials to discuss the review
findings and lay the ground for the final revisions of the Study. In accordance
with the mutual understandings reached in the meetings, the ISO agencies under-
took the last alterations and additions necessary to ready the Study for publication.
While the Study was carefully coordinated with the Puerto Rican Oovernment
throughout its preparation, all views in the Study are ultimately those of the ISO.
During preparation of the Study the Puerto Rico Planning Board and other
agencies of the Puerto Rican Oovernment extended invaluable assistance to
representatives of the Federal Oovernmen!. ISO teams visited Puerto Rico for
their fieldwork and all their efforts were supported by provision of access to key

ii
Puerto Rican Government officials and to the extensive data resources of the
Government. Puerto Rican technicallevel personnel were very helpful in furnishing
statistical material and numbers of essential data compilations were speciaJIy
produced by them for the Study.
Much of the analysis was also facilitated by the views and interpretations
offered by Puerto Rican observers throughout the private sector. Many business-
men, consultants, university teachers, and former Puerto Rican Government offi-
cials freely gave their time.
The Puerto Rican economy has been subject to a great deal of examination
and analysis over the years, aud the large, valuable body of literature available has
been widely consulted by ISG agencies. Previous inquiries, however, were generaJIy
concerned with particular aspects of the economy and none appear to have been
produced with the dimensions of this Study. The extensive Federal resources
employed and the approach taken in this elfort have made possible a study of the
most comprehensive scope yet undertaken.

William B. Pounds
Study Director

iii
Acknowledgements
A great many individuals contributed to this Study. Policy officials in the
cooperating Departments of the Federal Government gave generous amounts of
time. Numerous staff economists and program officers were continually engaged
in the research and writing. In a project of lhis size, it is not possible to name all
lhose who participated. Mention must be limited to principal contributors and
managers. Acknowledgements preceding each separate Study section indicate lhose
who had prominent responsibility in its preparation.
Under the general direction of the Secretary of Commerce, Juanita M. Kreps;
Assistant Secretary of Commerce Policy, Jerry J. Jasinowski, provided overall
guidance for the Study. Frederick T. Knickerbocker, Deputy Assistant Secretary
of Commerce for International Policy Coordination, provided policy support.
William B. Pounds directed the interagency work on the Study and the
operations of the Puerto Rico Study Staff. Staff members assisting with direction
of the Study were: Carlos F. Montoulieu, with special responsibility for Part
Two, Federal Program and Policies; Randolph Mye, with special responsibility
for the Industry Sector Study; RandalI Upton; and David McMeans. Mr. Oeorge
D. Hanrahan of the Office of the Chief Economist of the Department of Cornmerr;e
contributed advice to much of the staff work. Diann H. Painter of the Office of
the Deputy Assistant Secretary of Commerce for International Policy Coordination
assessed preliminary findings. Patricia D. Beander served as staff secretary.
The Puerto Rican Government gave extremely valuable assistance throughout
the Study. Mr. Miguel Rivera-Rios, President of the Puerto Rico Planning Board,
provided for responses to numerous requests made by Federal Study teams and
coordinated Puerto Rican Government suggestions on the Study. Boris Oxman
and Suriel Sanchez of the Planning Board extended helpful suppor!. Manuel
Dubon, Administrator of the Puerto Rico Economic Development Administration
(Fomento), Bertram Finn, Director of Economic Reserach for Fomento, and
Walter Davila, Director of the Office of Federal Affairs in the Office of lhe
Governor, offered valuable suggestions.

v
Table of Contents
Page
LETTER OF TRANSMITT AL ___________________________________________________________________ A

P REF ACE ____________________________________________________________________________________________________ 1

ACKN OWLEDG EMENTS ______________________ _____ ___________________________________________ ____ V

INTRO DU CTIO N ________ .______________________________ _________________________________ ___ _______ 1

EXECUTIVE SUMMARy __________________________________________________________________________ 3

PART ONE: GENERAL ECONOMIC ASSESSMENT ____________________________ 49

CHAPTER l.-SUMMARY AND FINDINGS _________________________________________ 53


CHAPTER Il.-THE GROWTH PROCESS IN THE PUERTO RICAN
ECONOMY ___________________________________________________________________________________________ 61
CHAPTER III.-EXTERNAL TRADE ______________________________________________________ 101
CHAPTER IV.-LAND, MINERAL, AND WATER RESOURCES ________ 111
STATISTICAL APPENDIX ____________ .___________________________________________________________ 139

PART TWO: FEDERAL PROGRAMS AND POLICIES ________________________ 151

CHAPTER l.-THE FEDERAL RELATIONSHIP BETWEEN PUERTO


RICO AND THE UNITED STATES _______________________________________________ 153
CHAPTER Il.-EFFECTS OF FEDERAL EXPENDITURES IN
PUERTO RICO _______________________ ___________________________________________________________ 159
CHAPTER III.-REVIEW OF DIFFERENTIAL FEDERAL PRO-
GRAM TREA TMENT IN PUERTO RICO _____________________________________ 175
CHAPTER IV.-RELATIONSHIP OF FEDERAL ASSISTANCE PRO-
GRAMS TO PUERTO RICO'S CRITICAL ECONOMIC REQUIRE-
MENTS _________________________________________________________________________________________________ 1 89
CHAPTER V.--SALIENT FEDERAL ADMINISTRATION AND REG-
ULATORy ISSUES ______________________________________________________________________________ 207
CHAPTER VI.-DESCRIPTIONS AND ANALYSES OF KEY FED-
ERAL PROGRAMS APPLICABLE TO PUERTO RICO ________________ 225
APPENDIX l.-INVENTORY OF FEDERAL PROGRAMS APPLl-
CABLE TO PUERTO RICO, FISCAL YEARS 1970-77 _________________ 329
Introduction
The Economic Study of Puerto Rico is made up of three parts.
Part One of the study is the General Economic Assessment. It provides a
macroeconomic overview of Puerto Rico containing a description and analysis
of production, income, employment, external trade, inflation, investment, and
the role of government. The assessment draws on information in the various
sector reports of the Study and brings together separate material in an overall
context. The assessment sets out the major issues confronting the Puerto Ricau
economy; these subsume all the other issues that are treated in the body of the
Study. In addition, Part One provides a conceptual framework for the development
of major alternatives for Puerto Rico in planning its future economic direction.
Federal Programs and Policies, Part Two, is designed to bring together in one
place an analysis of the characteristics and effects of Federal programs and policies
in Puerto Rico. It includes, within a systematic and summary treatment, those pro-
grams dealt with separately in lhe Part Three sector reports plus all additional
programs that are significant in Puerto Rico. Aspects covered include the relation-
ship of Federal assistance to Puerto Rican needs, the results of expenditures on
identified problems, and the differing program treatment that Puerto Rico receives
under its relationship to the United States. Part Two contains approximately 85
program profiles in a final section covering over 100 Federal programs accounting
for over 90 percent of the total Federal assistance going to Puerto Rico. The
pro files provide on a comparable basis a statement of program purpose, Puerto
Rican eligibility and treatment, actual outlays, administrative requirements for
funding, and identification of problems which prevent optimal participation by
Puerto Rico.
Nine sector studies, constituting the bulk of the Study, make up Part Three.
The Study is essential!y sectoral in its approach and (he sector analyses collectively
account for the main body of the Puerto Rican economy. The sector studies cover:
Industry
Agriculture, Food, and Rural Living
Tourism
Housing and Construction
Tran'portation
Energy
Commercial Banking
Employment, Wage Structure, and Migration
Social Conditions and HumanServices
No provision is made for a separate sectoral treatment of services, but the
Banking and Tourism Sectors together are important components of private
services activity in Puerto Rico, and most public enterprises services are covered
in the Energy and Transportation Sectors. Particular attention is given to the
goods sectors and, within this framework, Industry receives an emphasis consistent
wilh its major contribution to output. Construction is accorded special sectoral
treatment since it also is an important economic activity in Puerto Rico. A separate
sector study is included on employrnent, unemployment, and wages because these
labor aspects are of vital concern, and Iikewise, a separate report is provided for
social conditions and human services in consideration of the linkage to economic

1
progress. Each sector studyprovides a view of the structure and operation of the
sector, an examination of relevant Federal programs and policies, an analysis of
the significant problems, and a presentation of policy and program options.
An Executive Summary is provided in the forepart of the Study.

I
ji
JI
2
!
1t
Executive Summary
PART ONE: GENERAL ECONOMIC ASSESSMENT
The General Economic Assessment (GEA) of the issues. The four basic issues are interdependent, and
1nteragency Study pro vides a comprehensive analysis policy decisions concerning any one of them can
of the Puerto Rican economy. Macro trends for the involve important "tradeoffs" relating to the others.
period 1947 to 1977 are presented and discussed The basic issues are identified as follows:
within a broad analytical framework.' They cover
production, income, employment, trade, inflation, (1) Can the economy resume and sustain a high
investment, and the role of government. Essential rate of real growth?
material included elsewhere in the various sectoral (2) Can the high rate of unemployment be re-
reports underlines the analysis but considerable ad- duced?
ditional material is also provided. For example, the (3) Does the economy rely too heavily on the
report introduces new estimates of the capital stock United States for finance and trade?
and measnrements of !be rate of return on capital (4) 1s the distribution of income too unequal?
and approximations of the marginal and average pro-
ductivity of the capital. The lalter measures are
based on capital stock series not previously available FINDINGS RELATED TO THE
for Puerto Rico. These and other estima tes included MAJOR ISSUES
in the seetion should prove valuable in future re-
seareh and planning aetivilties. Major findings related to the four basic issues
The GEA is important from a poliey standpoint are reviewed here. Other significan! findings are
because the major issues confronting the economy found in subsequent sections which provide more
are specified and addressed. The report further dis- detail.
eusses polieymaking under specified eeonomie eri-
teria or objeetives. As is the case throughout !be Economic Growth
Study, poliey reeommendations are not expressed in The Puerto Rican economy, which had grown very
the GEA; however, policy options are diseussed at rapidly in the 1950's and 1960's under Operation
various points in !be analysis. Bootstrap, displayed very slow growtb in the years
between 1973 and 1977. The earlier growth pace has
CONSTRAINTS IN THE ECONOMY been partially regained in !be acceleration of growth
in 1978 and 1979. The decelerated growth experi-
The GEA cites five faetors that might impose enced between 1973 and 1977 resulted from the oil
barriers on the eeonomy. These result from the crisis and the ensmng U.S. and worldwide recession,
island's limited natural resourees, !he unskilled labor, a compound situation which brought a near doubling
the legislated rise in !be minimum wage rate, the lack of unemployment and declining investment in Puerto
of power to set monetary and trade policy and the Rico. These severe reactions of !be economy raised
island's high shipping costs. serious questions about Puerto Rico's future eco-
nomic strength. Puerto Rico's strong economic ad-
vance over the years was paralleled by a rapid trans-
MAJOR ISSUES formation from an agricultural economy to an in-
The discussion identifies four major issues. These dustrial export economy with increasing emphasis
major issues subsume numerous yet important sub- On production from capital-intensive industries.
Whe!ber that transformed economy could survive
1 AH dates refer to Puerto Rico's official fiscal year which runs became the major question.
from luIy 1 through lune 30. the year's designation being that of the
latter date. The analysis finds no fundamental change in

3
Puerto Rican circumstances that would precIude the tbe great infiux of capital to the economic syste~.
resumption of satisfactory economic growth after Clearly the capital intensification of the economy m
full recovery from the recession conditions of tbe the industrialization process did not sufficiently ab-
mid-1970's. That real growth in 1978 and 1979 has sorb tbe labor force growth. Neither, however, had
already resumed a pace in excess of 5 percent is the monocrop agricultural economy in the pre-Boot-
immediate evidence supporting the foregoing con- strap periodo It was the emigration to the mainland
cIusion. Real growth in the future, however, is that served as the "safety valve" for the growing
expected to be more moderate tban in the three post- labor force.
World War TI decades that are reviewed-probably The success Qf increased employment growth and
in the 5- to 6-percent range. The moderated future the reduction of Puerto Rico's unemployment wiII
growth would be consonant with the slower growth depend on whether future investment can be prop-
rates anticipated for .forthcoming years in the worId erly geared to make tbe most productive use of the
at large imd especially the United Stlltes, with whom island's surplus of labor. AIso involved in the im-
Puerto Rico will 'continue to be cIosely linked provement of the unemployment rate is the effective-
economicalIy. ness of special measures lhat might be designed to
Growth rates somewhat faster than tbose suggested heIp youths particularly to become employable and
might result if more intensive development of Puerto productive. However, before any appropriate policy-
Rico's agriculture and rura! infrastructure were at- making to suppress unemployment can take place,
tempted, allowing that industrial support programs accurate knowledge of the dimension and nature of
are not depressed in an offsetting manner. Such a the unemployment problem would be very helpful.
shift would require a new policy orientation of the Efforts to validate and improve labor market data
Government with greater attention being devoted to should probably receive high priority in planning.
problems of land use and natural resources. An One of the constraints the Puerto Rican economy
increased concern for the development of private faces in the near future is the legislated increase in
service industries, which are only partialIy covered in the minimum wage rate bringing it up to parity with
this overalI study, would appear also to offer sorne the mainland by 1981. The more labor-intensive
opportunities for contributing to economic progress. industries, such as semces, would be expected to be
NevertheIess, manufacturing concentrated in the in- hardest hit by the increases, particularly if profit
dustries whose comp¿titiveness will assure their vi- margins are aiso low in these industries. But due to
ability wiII seemingly continue to be the mainstay of the inadequacy of data, Iittle that is conc1usive can be
future growth. said about the shifts in the competitiveness of in-
dustries in Puerto Rico that could arise from the
anticipated minimum wage rate increases.
Employment
A high rate of unemployment persists as a long- Reliance on fue United States
term problem in Puerto Rico. Minimum rates of un- Altbough the United States served as a "safety
employment even in years of good economic condi- valve" for Puerto Rican labor force growth in thé
tions have fiuctuated in tbe 10- to 12-percent range. past and to sorne degree stiII does, Puerto Rico's
In the years of the recent recession the unemploy- economic reliance on the mainland is essentialIy
ment rate soared to over 20 percen!. Severa! serious threefold in nature-' (1) as a source of capital, (2)
questions can be raised about the accuracy of the as a dominant export market and source of imports,
unemployment estimates and tbeir relationship to the and (3) as a source of income support hy way of
estimation of the labor force and household survey transfer payments for a sizable portion of tbe popu-
techniques and responses. N onetheless, if the data are lation. The heavy reliance on U.S. capital leads to
assumed to be reasonably accurate, the unemploy- important economic consequences in that the direc-
ment problem is serious. Structural unemployment tion of the Puerto Rican economy is guided in many
appears to be as significant an element of the total respects by the decisions of mainland firms. The
unemployment as is tbe demand-responsive com- close trade ties with the United States, particularIy
ponen!. In April 1979 tbe level of unemployment on the export side, tend to make the island's economy
stiII remained slightly aboye 16 percent. subject to U.S. production shifts, although in severa!
It must be stressed that the unemployment rate in U.S. recessions prior to 1974 the impact on Puerto
Puerto Rico did not improve commensurately with Rico was minimal. The magnitude and growth of
the surge in the real rate of growtb in the economy. transfer payments coming from the Federa! Govern-
On fust glance this lack of paralIel performance be- ment in recent years have tended to shitt certain
tween unemployment and real growth may appear social and economic responsibilities, and the neces-
somewhat paradoxical. The answer lies largely in sity of transferring income to meet them, away from

4
the Commonwealth Government and toward the possibly bring about a more equal distribution of
Federal Government. Federal transfer payments in- income.
creased from 7 percent of Puerto Rican personal
income in 1970 to 20 percent in 1977. This infiow Background Analysis
constitutes a significant source of saving counter-
balancing Puerto Rico's net internal dissaving. The previous discussion dealt with the major
In view of Puerto Rico's net internal dissaving and findings of the study. The following sections provide
its limited tax base, there is no apparent alternative background detail supporting the findings.
to relianée on external capital sources. Although the
attraction of outside capital will continue by all ap- Product and Income' Trends
pearances as an essential ingredient for future growth,
efforts can be made to retain more of lhe profits from Puerto Rico's exceptional economic growth is well
investment within the Puerto Rican economy. documented. The island's gross domestic product
How the configuration of Federal transfers will (GDP)-which measures the value of production
and should be changed' in lhe future is an issue occurring on the island-and its gross national prod-
closely intertwined with the issues of increasing uct (GNP)-which measures the total product or
future economic growth and of employment and with income available to Commonwealth residents-show
the major issue regarding the equality of the distribu- a strong uptrend from 1947 to 1973. The GDP
tion of income. Policy implications pertaining to growth rate from 1947 to 1973, with adjustment {or
transfer payments must be considered wilhin the price level changes, averaged almost 7 percent a
context of aH four major issues. year, wilh the rate higher in lhe, 1963-73 period than
Besides finan ce, trade has been an extremely im- in the 1947-63 periodo The real GNP trend rate is
portant external factor for Puerto Rico. Being a small similarly impressive-averaging 6.1 percent a vear
island economy, external trade is both necessary and in lhe years 1947-63 and 6.6 percent in the 1963-73
helpful. Export markets have graduaHy been widened periodo Bolh product measures show a marked drop,
and further diversification of export destinations can however, in the recession and recovery years of
occur if Puerto Rico remains a competitive producer. 1973-77 when the growth of real GDP and GNP
Import substitution, whenever it is more efficient than averaged 1.7 and 1.0 percent·a year, respectively.
importation, may have some potential in decreasing Per capita GDP and GNP, when viewed over the
dependence on U.S. imports. Future trade growth, enlire industrialization period, provide an even more
however, will be closely linked to offisland condi- meaningful picture of Puerto Rico's economic prog-
lions. ress. From 1947 to 1963 per capita GNP accelerated
significantly-a refiection of both economic growth
as well as substantial migralion. In lhe period from
Income Distribution 1963 lo 1973 per capita GNP decelerated, how-
ever, as migration slowed; and between 1973 and
1977 per capita GNP declined by more than 2 per-
The distribution of personal and family income cent in response to the pressures of the oi! crisis and
shows a high concentration at the top, wilh the subsequent recession.
majority of Puerto Rican families receiving only a
small part of total income, as reported by the U.S. GDPjGNP Gap
Census. In 1969 the poorer half of lhe economy
received only 15 percent of gross domestic income In many economies, such as the United States, the
while the upper 20 percent obtained 55 percent of GDP 'and GNP are nearly identical in magnitude.
the income. The period of rapid economic growth Their discrepancy in such instan ces is of little im-
brought some overall moderation in the inequality of portance; but when a substantial divergence develops,
income; but in recent years, as unemployment inten- as is lhe case in Puerto Rico, the ratio of the two
sified, a sizable percentage of the pcpulation has measures is significant. Puerto Rico's GDP exceeds
relied on increased Federal transfer payments to its GNP. The gap, with GDP greater than GNP,
bolster family expenditure. started to develop about 1963, inverting the previous
Desirable as a more equitable distribution of in- trend. The divergence increased notably in the
come might appear to Puerto. Ricans, emphasis on 1970's. The recent widening of the gap is perhaps the
this objective must be weighed against its im pact on clearest evidence of Puerto Rico's close. and growing
saving and investment. If economic growth is to be dependence on external resources. This is because
reestablished and sustained-albeit at a lower level the gap consists almost entirely of profits and in-
than in the 1950's and 1960's-the Commonwealth's terest income remitted to firms and creditors on the
tax and spending pclicies, properly guided, could mainland.

5
CycIical Behavior of Puerto Rico's Output families received only 15 percent of the income while
the top fifth received 55 percen!.
As already mentioned in the discussion of growth
Progressive taxation and transfer payments-pri-
rate averages, Puerto Rico's GDP and GNP dropped
marily from the Federal Government-have been
sharply in the recent recession. The pattern of the
used as policy measures directed toward lessening
response, however, is of interes!. In 1975 real GNP
the concentration of the income distribution. Whetber
declined $69 million in constant 1954 doIlars or
the recent high level of transfer payments is sustain-
about 2.5 percent while real GDP, which had started
able and desirable over the long run is questionable.
to decline in the preceding year, dropped 2 percent.
Promoting employment in tbe higher productivity and
This response is often cited as evidence of the
wage rate sectors, areas which might contioue, as io
extreme sensitivity of the Puerto Rican economy to
the recent past, to absorb large numbers of low-
production shifts in the United Sta tes. The synergistic income persons, can favorably impact the income
response of actual decline in product was somewhat distribution.
atypical, however. In several previous U.S. recessions
that occurred between 1950 and 1970, Puerto Rico
Employment and Labor
either sustained its real growth rate or showed only
very slight deceleration in i!. The fact that prior to As stated in the discussion of fiodiogs, high un-
1973 the strong upward trend in Puerto Rico's employment has been a chronic problem in Puerto
growth was interrnpted only mildly by mainland Rico. In the 1950's and 1960's when industrializatioo
recessions was due iu part to extensive development was rapid, new job creation was significan!. Notwith-
of the economy's infrastructure going on at the time. standing the substantial increase in employment op-
The expansion of the infrastructure, in essence, portunities aod the reHef of population pressure,
tended to submerge unfavorable impacts resulting particularIy in the 1950's and earIy 1960's through
from shifts in U.S. demand for Puerto Rican exports. migration to tbe US. mainland, unemployment re-
Whether the degree of responsiveness of the Puerto mained at a level between 10 and 12 percent of the
Rican economy to U .S. production shifts will be work force. Even at its peak, manufacturing growtb
similar in the future is a question that has important was not strong enough to offset declines of employ-
implications. Unless Puerto Rico launches into a meot in other sectors, particularIy agricuIture. In the
second phase of infrastructure development, or con- recession years of 1974-75 unemployment roughly
centrates on fairIy income-inelistic exports, or greatly doubled aod it remains high at the present-just over
diversifies its exports markets, it may be expected to 16 percent in April 1979-even though substantiaIly
track U .S. conditions more c10sely in the future than faster real product growth has resumed.
in the pas!.
Unemployment and Employment Pattems
Income and Its Distribution The demographic unemployment aod employment
Puerto Rico's sectoral income measures tend to patterns in Puerto Rico are significan!. Uoemploy-
c10sely corroborate tbe trends and shifts in GDP and ment among youthful workers is particularIy high. In
GNP. Significant changes revealed in the distribution 1977, when the overalI unemployment rate hovered
of GDP which refiect the restructuring of the econ- around 20 percent, 48 percent of the 16- to 19-year
omy that went on over the years between 1947 and olds io the labor force were without jobs. Moreover,
1977 also emerge in tbe aggregate income data. Agri- the lack of job prospects for this age group is par-
cultural income, for example, was cut back fivefold tialIy refiected in 10w laborforce participation rates-
as a percentage of total domestic income while manu- 27 perceot for males and 12 percent for females. In
facturing's share doubled. SimilarIy, the income share contrast to the mainland, unemployment rates for
generated in the government sector registered exten- men are higher than for women. This is partly due to
sive gains over tbe years; and further, the share of the higher unemployment among predominantly male,
income derived from construction rose quickly in the blue-colIar workers in tbe construction industry and
1960's, although it subsided after 1970. agricuIture and partly due to the lower participation
Of particular interest is the income distribution rate for women than meo.
considered on a population basis. Scarcity of data Sectoral trends in employment refiect basic changes
and complications of analysis have Iimited study in in the economy. Agricultural employment has con-
this field, but a private investigation shows a high sistently declioed-from 23 percent of Puerto Rico's
concentration of income in Puerto Rico. 2 According total employment in 1960 to 6 percent in 1977.
to the study, in 1969 the poorer half of Puerto Rican Manufacturing employment, on the other hand, grew
markedly during the 1960's and the early 1970's. A
2 Maldonado, R. M., "The Economic Costs and Benefits of Puerto
Rieo's PoliticaI Alternatives," The Southem Economic ¡oumal. vol.
similar rapid growtb occurred in the service and
41, No. 2, October 1974. trade sectors and io governmen!. Coostruction em-

6
ployment showed sizable gains until 1972. It then External Trade
turned down and continued to decline until 1977,
when it recovered somewhat. In the 1970's employ- Characteristics of Puerto Rican Trade.-Sizable
ment grew the fastest in the government sector in external trade-primarily with the United States-
response to the expanding scope of government has long been an essential feature of the Puerto Rican
activities and Federal Comprehensive Employment economy. Praduction for export is the impetus for
Training Act (CETA) programs which directly sub- much of the economy and, on the import side, Puerto
sidized government employrnent. Rieo increasingly relies on external sources for raw
materials, inte.rmediate goods, and final consumption.
Structural Unemployment Imports have consistently exceeded exports, with
the trade account deficit rising in recent years. In
Puerto Rieo's employment environment and its 1977 the trade deficit amounted to $1. 6 billion, with
outlook are unclear. The persistent drop in agricul- imports at $6.1 billion and exports at $4.5 billion.
tural employment is due in part to the inability of
Puerto Rican farmers to keep up with the technolog- The heavy orientation of trade toward the main-
ieal progress found e!sewhere and in part to the shift land is clearly evident. In 1977 the United States
in the factor cost ratio between the agricultural and received 86 percent of Puerto Rico's shipments; in
the industrial sectors. Furthermore, labor-intensive earlier years, the U.S. share reached as high as 97
manufacturing could be adversely alfected by labor- percent. Imports are largely from the mainland,
cost inflation which might be exacerbated by further although the dominance here has been reduced.
minimum wage rate increases scheduled for the next Whereas in 1950 Puerto Rico received 90 percent of
several years. The competitive position of sorne its imports fram the United States, in the first half of
energy-intensive industries has been damaged by 1978 about 60 percent carne fram this source. Sorne
world oil price. of this shift in import origin developed gradually prior
to the early 1970's. The majar change, however,
The recent rapid employment increase in the Gov-
carne abruptly in 1974 with the sharp rise in crude
emment and several other service areas has reduced
oil prices.
the pressure on the praduction sectors to absorb
unemployed workers. The recent pace of rising gov- The eomposition of Puerto Rieo's trade has
emment employment, however, cannot be main- ehanged significantly since 1950. In the early 1950's
tained. Although CETA funds helped significantly, sugar aecounted for more than 50 pereent of exports,
Commonwealth taxing and borrawing which also but by 1960 its share had declined to 24 percent and
supported such increases in the recession years have by 1977 to 2 percent. Shares of other traditional ex-
been severe!y stretched. Employment in agriculture, port items, such as appare! and tobacco, also declined
manufacturing, and nongovernment service indus- over the years. Exports of manufaetured goods, on
tries-such as tourism-must grow if Puerto Rico's the other hand, increased markedly both in absolute
unemployrnent is to be materially reduced and new value and in share as Puerto Rican industrial devel-
labor force entrants are to find employment. opment eontinued. In 1950 manufactured goods,
aside fram apparel, amounted to 12 percent of total
Because of doubt about the accuracy of immigra-
exports; however, by 1960 they made up 30 percent
tion data, there is some question as to whether the
and by 1977 about 50 pereent. Chemieals (including
present unemployment estimates are overstated.
drugs and pharmaceuticals), refined petroleum, and
Nevertheless, unemployrnent is high and needs to be
machinery (especially eleetrieal maehinery and parts)
addressed with vigorous new policies. The 10- to
are items of immense export importanee today.
12-percent unemployment rate cited earlier, which
Import trends also refleet Puerto Rico's inereased
appears to have been a baseline level, may serve es-
industrialization. Consumer goods, which aceounted
·f sentially to measure the economy's structural unem-
for about half of the imports in the early years of the
ployment. Insofar as unemployment is a structural
industrial elfort, gradually declined as a proportion of
problem, its elimination will can for selective rather
total imports. Conversely, the share of raw materials
than macro policies.
and intermediate goods, whieh had risen graduaI1y
Education and training are pertinent to the em- over many years, surged in 1974 with the violent
ployment outlook, especially in view of the high per- price inerease in erude oil.
centage of jobless youths and the high rate of popu-
lalion growth. The average schooling period in Trade Prohlems.-The cIose trade relationship
Pnerto Rico is les s than on the U.S. mainland. A with the mainland has probably enabled Puerto
scarcity of technically trained persons continues to Rico to aehieve mueh fas ter rates of growth than it
be a prablem. Sustained growth in employment and would have experieneed if it had relied excIusively
labor productivity will require greater investment in on internal demando Although the building of infra-
1 Puerto Rieo's human assets. strueture kept the Puerto Riean economy fram being

j 7
completely reflective 01 mainland economic con di- Iy parallels total cost-push inflation, which includes
tions, the heavy dependence on the U.S. market, interest, rent, and profits as well as labor cost.
nonetheless, has made a significant portion 01 the
InlIation by Sectors.-The study also explores the
economy quite sensitive to fluctuations in the main-
sectoral sources 01 Puerto Rican inflation by com-
land economy. Greater diversification of export des-
paring the inflation rates measured by the price
tinations could help insulate Puerto Rico !rom the
deflators for the various GNP components. The data
concentration of influences coming from mainland
show a marked growth 01 all of the component prices
economic forces.
throughout the 1950-77 period with particularly
In recent years Puerto Rico's competitive export
strong acceleration in the 1970's. In this recent
position has been hurt by several elements. Among
period, prices 01 imports and exparts registered the
them, cost-push factors contributed signifieantly to
largest advances among the GNP components, impart
the loss of competitiveness, particularly in some
prices bardering on double-digit increases and expart
labor-intensive industries where increases in real
prices rising only slightly less. Consumer prices in-
wages may have exceeded productivity gains. Also,
creased moderately in fue 1950's and early 1960's,
since Puerto Rico relies entirely on imported crude
accelerated in the late 1960's, and swung up swiftly
oil, the abrupt rise in oil prices has affected com-
following the 1973 oi! crisis as the U .S. inflation
petitiveness to some extent and has raised the ques-
reached double-digit levels. The main internal infla-
tion of the viability of the refining industry and
tionary impact came from intensive construction de-
downstream petrochemical operations. If future
mand which lasted for more than a decade. The
OPEC price hikes are modest, further disruptions
significant inflationary impact which was transmitted
from energy costs will be avoided; but, as long as
from the trade sector is not surprising in view 01 the
Puerto Rico remains dependent on imparted oil for
openness 01 Puerto Rico's economy and its heavy
essentially all its energy needs, its economic stability
reliance on external trade.
will depend significantIy on the pricing policies of
the oil supplying nations.
Despite several decades of emphasis on industrial Government Sector
development and rapid growth 01 the manulacturing The role 01 government, both Puerto Rican and
sector, Puerto Rico still imports nearly 40 percent Federal, in the economy is extensive, having expand-
of its durable and nondurable consumer goods. This ed considerably in the past 10 years. In terms 01 ag-
heavy dependence on imported goods suggests that gregate employment, the government sector has been
impart substitution policies might be worthy of the fas test growing sector in recent years. Govern-
careful consideration. ment expenditures have undergone manifold in-
creases-in real terms as well as nominal. Federal
Inflation and Commonwealth tax policies have been extremely
important in stimulating industrial growth throughout
The rate of inflation in Puerto Rico in the tbree the post-World War II periodo
decades between 1947 and 1977 was approximately Trend of Cornrnonwealth Expenditnres. - The
the same as in (he United States, averaging a little combined expenditures 01 the Puerto Rican Com-
less than 3.5 percent annually. Since 1973, however, rnonwealth and municipalities climbed steadily after
the Puerto Rican inflation rate has been somewhat 1950 and then accelerated in the mid-1970's. The
under the mainland rate. growth was due in part to expanded health, educa-
Nafure of Inflation.-In order to determine the tion, and other social services but much of it resulted
nature of the Puerto Rican inflation, demand-pull from striking increases in the number and scope 01
and cost-push inflation indicators were ca1culated public enterprises. These enterprises are primari!y
and superimposed on a profile 01 Puerto rueo's in- capital-intensive and add significantly to the large
flation rate lor the period 1947-77. The exercise stock of fixed assets held by the government sector
shows the eost-push inflation component, whlch itself. In 1976 and 1977-years when private invest-
trended upward strongly throughout the period, to ment declined-government (including the public
be the dominant factor. Nonetheless, sharp increases enterprises) provided about 40 percent 01 total in-
in the demand-pull component (lagged 1 year) coin- vestment and more than 60 percent 01 the investment
cided with steep accelerations in the rate 01 inflation in industrial and commercial bui!dings.
at several points (e.g., in 1951 when the Korean War The rapid growth 01 government operating expen-
started). Although evident in several years cost-push ditures raised some criticism in Puerto Rico, espe-
inflation jumped up rapidly in 1969 and surged sev- cially since large pay increases which averaged about
eral times in the 1970's, subsiding only in 1977. 10 percent a year in the early 1970's were viewed as
Further analysis shows that labor cost infiation close- highly infiationary. The criticism was directed against

8
the uufavorable budgetary impact and the encourage- have made the tax concessions of greater value in
ment of demands for increased wages in the private recent years.
sector. In 1977 and 1978 raises in government sal-
aries slowed to about 2 percent. Investrnent
Public Uebt.-With the growing role of govern-
ment carne rapid increases in public debt issuance, Sources of Capltal.-Puerto Rico has relied heavi-
particularly in the 1970's.. As publ!c works and Iy on external capital throughout its industrial de-
capital expenditures of pubilc enterpnses expanded, velopment. The growth of the capital inflow in the
Puerto Rico's public debt grew from 49 percent of 1960's and 1970's was particularly remarkable; in
GNP in 1973 to 80 percent in 1977. 1963 the net inflow (errors and omissions inc1uded)
totaled $250 million, grew to $882 million in 1970,
The exceptional growth of the pubJic debt is a
and reached $1,510 mil1ion in 1977. As the external
trend with serious impJications for the future. The
capital source swelled, its importan ce relative to the
recent rate of growth of Federal Government sup-
total use of funds likewise increased. Whereas be-
port for Puerto Rican programs which are described
tween 1947 and 1963 outside capital financed 44
below cannot be expected to continue. Puerto Rican
percent of the economy's total uses of funds, from
personal income taxes, temporarily increased in
1963 to 1973 it covered 61 percent. As the income
1975, may not be able to provide the sizable addi-
counterpart of this ¡zrowlh, the share of total pr~perty
tional revenues needed. Decisions regarding the level
income in Puerto Rico distributed to nonresIdents
of public investment and individual projects involve
grew much faster than the funds they suppl!ed.
weighing benefits against repayment cost~. Con-
There is no apparent shortrun alterna(¡ve to an
straints may be placed on fnture borrowmgs by
extensive reJiance on outside savings for financing
mainland investors since they are the chief pur-
Puerto Rico's investment. Alternative sources of
chasers of Puerto Rican bonds. Assuming, however,
investment funds consist of the private saving of
tbat mainland investors continue their willingness to
Puerto Rican residents and businesses and the gov-
purchase Puerto Rican issues, it is up to the Puer.to
ernment surplus. i.e., excess of revenues over current
Rican Government to decide how large a share of lts
expenditures of lhe Commonwealth, municipalities,
GNP should be allocated to government functions.
and pnblic corporations. However, neither of lhese
Federal Goverument Role.-The Federal Govern- sources offers adequate promise in the near future.
ment contributes significantly to the Puerto Rican A first reason Jies in the fact that Puerto Rican
economy by giving grants to tbe Puerto Rican personal saving has been consistently low or nega-
Commonwealth and municipalities, by income-sup- tive, making virtually no contribution to capital
port funds transferred direclly to Puerto Rican resi- accumulation. The extraordinarilv "high-consump-
dents, and by providing services through Federal tion" altitude shown in Puerto Rico is frequently
Government agencies operating on the island, par- cited by Puerto Ricans as unique. However, saving
ticularly the Department of Defense and the Vet- when taken in respect to personal income does not
erans' Administration. appear to be unique judging from the information
available for other economies. The persistence of
Historically, funds for operating expenditures have significant levels of dissaving in relatian to perso~al
been the largest part of government budgets. In the disposable in come, on the other hand, does raIse
past decade Puerto Rican governments received 20 questions concerning the underlying influences which
to 28 percent of their receipts from the Federal in their net effect heavily favor current consumption
Government. Only in recent years have the Federal over future consumption. In order to reduce the
transfer payments to residents increased rapidly. By island's reliance on outside capital, saving can be
1977 such payments constituted abeut 20 percent of "forced" internally (within limits) by taxation. But,
Puerto Rico's personal income-up from 7 percent in view of substantial postwar in creases in consumer
in 1970.
taxes relative to incomes, this approach appears to
Another important role of the Federal Govern- offer only limited possibilities.
ment is that of a stimulalor of Puerto Rican in- The possibility of increasing business saving in
dustrial growth throngh tax poJicies. The U.S. tax Puerto Rico appears Jikewise Jimited. Business saving
exemptions granted to firms investing in Puerto Rico by Puerto Rican companies is already relative1 y high
go back many years. But the Internal Revenue Code and is being con verted into investment in the econ-
revisions of 1976 and the changed economic environ- omy, although sorne increase of saving effort might
ment which ultimate1y diminished the importance of be feasible." As for the third possibility-that of
low labor costs and tariff-free entry of products into
the United States-two particularly advantageous
3 The tongate tax on repatriated profits assists in retaining profits
features of Puerto Rico in the earlier development- of external investors on the island.

9
government surpluses providing investment finance- productivity of capital were compared in several
lhe rapid growth of government expenditures in re- ways.4 Although the average productivity of capital
cent years which has been described earIier would in Puerto Rico in recent years seems to be substan-
have to be confined to revenue Iimits, a situation tially less than on Ibe mainland, lower wage costs
that would demand austerity and could be depressing and an apparentIy grealer concentration of capital-
lo growth and employmen!. Given these inadequate intensive production have resulted in higher average
alternatives, cIearly only the long-term redirection rate of profit from investments in Puerto Rico.
and management of saving relationships can reduce The investigation of capital efficiency in Puerto
the reliance on external financing. This process would Rico in terms of the marginal productivity and the
have to be accomplished within an economy in which rate of return indicates that there may have been
nnemployment has been reduced to an acceptable sorne decline in efficiency in the long term as capital
level. The chronic unemployment in Puerto Rico was deepened. Moreover, a clear deterioration in
obviously confronts Ihe reduction of the dependence capital efficiency resulted from the production cut-
on outside saving. backs in the years between 1973 and 1977.
Gross Fixed Investment and Cauital Stock.-The Future Growth and Investment.-In attempting to
availability of ample external funds, enticed largely answer the Question whether Puerto Rico's eeonomic
by the benefits of the U.S. Tax Code Provision 931 growth could resume former paces, the analysis pre-
(now 936) eoupled with the exemptions and subsidies sents several test combinations of investment shares
provided by the Puerto Rican Investment Incentives of the GDP and future growth rates of real GDP.
Act, underwrote much of Puerto Rico's rapid real The approach provides a means of delineating pos-
growth. In the growth process, gross domestic fixed sible future growth rates for the Puerto Rican econ-
investment (GDFI) advanced in real terms at an omy that seems realistic. The GDFI/GDP shares in
average rate of almost 11 percent ayear between the analysis are compatible with historical ICOR
¡ 947 and 1963. In this time span the private seelor (Incremental Capital-Output Ratio) values and real
eontributed nearly 60 pereent of the fixed capital GDP growth rates.
formation while public enterprises acconnted for 26 The test combinations indicate that real annual
percent and the Government 15 percen!. Allbough growth rates of GDP in the range of 5 to 6 percent
GDFI growth decelerated in the 1964-73 period, the would not be an unreasonable expectation for Puerto
average annual level in real terms was more than Rico in coming years. Such arate is more moderate
three times that of the earlier years, with the share than lhe rates experienced during Puerto Rico's in-
of private enterprise capital rising to 70 percen!. By dustrialization, but nevertheless represents a signifi-
1973 the investment boom had run ils course and cant future real growth in the economy if the pace
with the impacts of U.S. inflation and recession, the can be maintained while avoiding undesirable infla-
oil crisis and worIdwide slowdowns, fixed capital tion rates. With significant innovation accompanying
accumulation in Puerto Rico was severely reduced. future capital input, even faster growth rates could
Between 1973 and 1977, GDFI in constant 1954 be achieved. If Puerto Rico is to aHain maximum
doIlars decIined 36 pereent-from $565 million to real growth with limited inflation, innovative changes
$360 miIIion. The major contraction was in the would seem to be particularIy beneficia!. The inno-
private sector. vations would ultimately allow smaller investment
The accelerated accumulation of fixed capital in shares to be maintained for given growth rates of real
the 1960's and earIy 1970's augmented Puerto Rico's output, reduce production costs, and increase em-
capital stock substantially. Estimates made for this ployment demando
study show that despite the serious decline in invest-
ment between 1973 and 1977, the average total gross Macroeconomic PoUey Fonnulation.-The Stndy
fixed capital stock in these years was 60 pereent discusses the relationship between macroeconomic
greater than the average in the 1964-73 decade. A policy and the criteria or objectives set out to guide
eomparison of the annual average stock level in Ihe and assess policy outcomes. Several frequentIy used
¡ 973-77 period, even with its depressed investment, criteria of economic progress are mentioned in the
against that for the 1947-63 period shows an impres- discussion. Among these are: (1) the level of unem-
sive 10-percentage point increase in the share of ployment, (2) the growth rate of real output or
private capita!. This change no doubt reflects the product in the economy, (3) the rate of income
strong trend toward more capital-intensive produc- growth and the degree of equality of the income dis-
tion techniques which paralIeled Puerto Rieo's indus- tribution, (4) the rate of inflation, (5) the stability of
trialization. the GNP and GDP, and (6) the rate of capital forma-
i The average productivity of capital, and the marginal productívity
Capital Efficieney and Profitability.-Puerto Rican referred to latcr on, are jn the stríctest sense approximations of these
and U.S. mainland rates of return on capital and the concepts.

10
tion. The study makes no suggestions as to the rank- policy recommendations are not provided in the
iug of these or similar criteria of policy, but merely analysis in the Study since it is the prerogative of
points out the necessity of such rankings in order to the Puerto Rican Government to set whatever rank-
provide proper sense of direction to policy. The ing of policy criteria it desires. Various policy options
criteria are generally not independent. This implies are to be found in the GEA, however, as well as in
that "trade-offs" or weighings of the importance of the Study at large. In Puerto Rico's case policy imple-
one outcome with other results are necessarily pre- mentation is confined largely to the use of !he Indus-
scribed and understood. The devices available to trial Incentives Act (HA) in providing differential tax
policymakers to implement their decisions in direct- privileges as selective stimuli to industry. Front-end
ing !he economy are called policy instruments within loadings of subsidies also allow variations of policy.
the systematic framework formulated in the discus- Furthermore, the Government can use its budgetary
sion. powers to help create economic conditions that are
policymaking within this framework is suggested conducive to real growth of the economy and prog-
by the report for Puerto Rico. It is pointed out that ress of the Puerto Rican society.

11
PART TWO:
FEDERAL PROGRAMS AND POLICIES
A separate report on Federal policies and pro- established by Public Law 600 in 1950, every deci-
grams is included in the Study 'lo bring together in sion by the Congress or the Executive Branch in
one place the main features and the economic im- policy application or program implementation has
pacts of !he Federal-Commonwealth relationship. altered the relationship. The general nature of the
The aspects covered are: (1) the effects of Federal present relationship is one of great Federal influence
expenditures on Puerto Rico; (2) the differential in the social and economic structure of the Com-
treatment of Puerto Rico in Federal programs; (3) monwealth.
the relationship 'Of Federal assistance to Puerto
Rico's economic needs; and (4) several important EFFECTS OF FEDERAL
Federal administrative and regulatory issues. The EXPENDITURES IN PUERTO RICO
full report also contains profiles which review 103
"key" Federal assistance programs applicable to Types and Magnitudes of Federal
Puerto Rico. Expenditures
The disbursement of Federal funds to Puerto Rico
THE FEDERAL RELATIONSHIP has extremely important impaots on the island's
BETWEEN PUERTO RICO AND economy. The actual quantities of Federal funds, as
THE UNITED STATES OF AMERICA well as their relative importance to !he Puerto Rican
economy, have increased substantially since 1970.
The relationship between Puerto Rico and the For the period 1970-77, gross Federal disburse-
United States of America has experienced various ments to Puerto Rico grew by 270 percent-from
changes since Puerto Rico became an American $839 million to $3,108 million. Net Federal dis-
possession in 1898. This relationship has ranged bursements (i.e., gross disbursements' less Puerto
fram an initial status as a militarily occupied posses- Rican payments to the Federal Goverument) in-
sion, through several stages as a territory, to the creased almost fourfold-from $608 million in FY
present status as Commonwealth, or Free Associ- 1970 to $2,381 million in FY 1977. In the 3-year

i ated State (Estado Libre Asociado). In each of the


perlods in which these statuses have existed the rela-
periad of FY 1974-77 net Federal disbursements
rose from $1,017 niillion to $2,381 million. Net
I
!
tionship has been somewhat different, as has the
concomitant influence of Federal laws, Federal reg-
Federal disbursements, which represented only 13
percent of the Puerto Rican GNP in FY 1970,
i nlatory programs, and Federal funds on the Puerto accounted for 30 percent of GNP in 1977.
I Rican economy. The very large increases registered in FY 1975
! Puerto Rico's acquisition of Commonwealth status
in 1952, which resuIted in considerable local govem-
and 1976 were primarily due to !he inclusion of the
Commonwealth in the Food Stamp program, and the
I mental autonomy, was followed by several congres-
sionally mandated investigations designed to c1arify
or modify particulars of !he Commonwealth rela-
enactment of several major Federal assistance pro-
grams, for which Puerto Rico was made eligible,
e.g., Comprehensive Employment and Training Act
tionship. What the present Commonwealth status (CETA).
means is not always exactly clear because Puerto Transfer payments, i.e., expenditures for which
Rico's status is unique in American law. In general, no goods or services are exchanged, accounted for
the present relationsJúp between Puerto Rico and the largest share of Federal disbursements to Puerto
the Federal Govemment has been altered and affect- Rico, most of these payments being made to indi-
ed by the numerous decisions taken by the Federal viduals. Gross Federal transfer payments increased
Government toward the Commonwealth. Acting gen- sixfold-from $303 million to $1,835 million (in
erally within !he limits of the compact relationsJúp current dollars) in !he 1970-77 periodo Net transfer

13
payments increased more than fifteenfold-from $72 Transfer payments to individuals have the most
million to $1, I 07 million in the same periad. The direct and significant impact on Puerto Rican income.
intraduction of tIte Food Stamp program in Puerto In 1976, Federal transfer payments to individuals-
Rico was primarlly responsible for the sharp in- $1,213 million-accounted for 19 percent of Puerto
creases registered in net payments. Although transfer Rican personal income. This was an increase from
payments per capita have been lower in Puerto Rico 1974 and 1975 when Federal transfer payments
($534 for FY 76) than on the mainland ($715 accounted for 10 and 15 percent, respectively.
for FY 76), their percentage of per capita personal A comparlson of Federal transfer payments to
income is greater-22 percent in Puerto Rico vs. 9 Puerto Rico and to several selected States (e.g.,
percent in the United States. Arkansas and Mississippi) over a perlad of several
The second largest category of Federal disburse- recent years indicates that, although Puerto Rico
ments in Puerto Rico is grants-in-aid. In nature and received lower absolute amounts, the ratio of pay-
purpose, these are similar to transfer payments, but ments to total personal income was consistently high-
are normally handled differently, i.e., througb pub!ic er in Puerto Rico.
agencies which provide services rather than through It is difficult to trace the fiow of other Federal
receipt directly by individuals. In the 1970-77 perlad funds into Puerto Rican incomes or to determine the
grants-in-aid increased 230 percent-from $256 mil- income-generatiug effects. However, using an overall
!ion to $845 million. income multiplier of 1.4--considered reasonable for
Net operating expenditures of Federal agencies in Puerto Rico--the increase in total net income in the
Puerto Rico, which indude such items as salaries, 1970-76 perlod resulting from direct Federal expen-
rent, equipment and supplies, amounted to $160 ditures is estimated to have been about $1,080 mil-
million in FY 1970 and rose to $230 million by FY lion, or 37 percent of the total increase in Puerto
1977. Although such expenditures may have less of Rican net income. On this basis, personal income
a direct impact than those of transfer payments and generated from Federal expenditures would have
grants, they have significant local employment and been $2,325 million, or 54 percent of the total in-
consumption effects. crease in personal income in Puerto Rico.
Approximately $1,000 million in Federal excise
taxes and customs duties were rebated to the Puerto Impact of Federal Outlays on Puerto Rican
Rican Treasury by the Federal Government in the Govemment Services
1970-77 periad. In 1976, the revenue derlved from
these two sources represented about 9 percent oi the Federal funds add substantially to the Common-
Commonwealth's budget. wealth's total revenuesand consequently to the pro-
Loans and loan guarantees, although not aggre- vision of government services to residents of Puerto
gated with other Federal disbursements in determin- Rico. Although sorne Federal funds go to municipal
ing Federal payments sinGe they are of a different units, the Commonwealth Government is the pre-
nature, must be considered in any analysis of the dominant reci pien t.
effects of Federal funds. In total, thevarious Federal In 1975, the percentage of Federal contributions
credit agencies have contributed significantly to the to total Puerto Rican revenues (Commonwealth and
net fiow ofcapital into Puerto Rico over the years. municipal governments) was 26 percent. The com-
New long-term loans increased fivefold in the 1970- parable input to the total revenues of States and local
77 perlad-from $43 million to $206 million; loan governments in the United States was 18 percent.
guarantees amounted to $165 million in FY 1976.
Functional Distribution of Federal
Effects of Federal Outlays on Disbursements
Puerto Rican Income As indicated, Federal disbursements have a critical
Federal funds are critically important to Puerto effect on Puerto Rican incomes and government
Rican income. Directly and indirectly these funds services. They are important in meeting social needs
supply such a large share of Puerto Rican personal and they spur consumption and demando However,
income that on occasion the personal income exceeds only relatively limited amounts of Federal funds are
GNP. That is, personal receipts of Federal funds available and allocated as "direct aid" for the island's
make possible a leve! of personal income which has economic development.
exceeded the value of final goods and services pro- An analysis of the direct contribution of Federal
duced on the island by local residents. The growth assistance for the economic development of State and
of Puerto Rican personal income in recent years local governments indicates that abaut 30 percent
parallels the growth of Federal assistance to the went for this purpose in 1976. In the case of Puerto
island. Rico (induding that assistance which goes to munici-

14
palities), however, the receipt of "economic develop- economic development, e.g., the Interstate Highway
ment assistance" is estimated to be approximately Construction Program 1 and Vocational Education
24 percen!. Basic Grants.
Two features are noted in connection with the
distribution of Federal funds from the standpoint of
!he economic development oi Puerto Rico. First, RELATIONsmp OF FEDERAL
most of the grants and loans that are directed at ASSISTANCE PROGRAMS TO
specific targets primarily reflec! Federal priorities PUERTO RICO'S ECONOMIC NEEDS
which in sorne cases are not fully consonan! with
Commonwealth priorities. Second, the matching re- Three of Puerto Rico's basic economic develop-
quirements stipulated by many Federal programs in ment concerns affected by Federal programs are con-
noneconomic development categories tend to divert sidered: (1) reducing unemployment, (2) increasing
available Commonwealth funds !hat might be direct- productivity, and (3) increasing capital investment.
ed to economic development purposes.
The report suggests several ways in which Federal Reducing Unemployment
outlays might possibly be redirected to help spur
economic development. These indude program mod- Large amounts of Federal program funds have
ifications so as to provide a greater flow of direct gone to help reduce unemployment in Puerto Rico.
economic development funds; increases in the overall In the years 1970-77, approximately $722 million
magnitude of Federal funds to the Commonwealtb, was allocated under several programs, of which the
within prevailing Federal budget Iimitations; and the Comprehensive Employment and Training (CETA)
possible establishment of !he "Antilian Economic program was most important.
Development Region" for Puerto Rico and the Vir- Results from these programs have been modest in
gin Islands under Title V of !he Regional Develop- Puerto Rico. The limited accomplishments reflect in
ment Act of 1975, which could direct attention to part the severity of tbe unemployment problem on
and provide assistance for comprehensive long-range the isJand-almost at the 20-percent rate in 1977-
development planning. and the fact tbat many of the programs are designed
to combat cyc1ical unemployment whereas Puerto
Rico suffers from a combination of cyclical and long-
DlFFERENTIAL FEDERAL PROGRAM term structural unemployment. In the case of the
TREATMENT IN PUERTO RICO CETA program, funds were used predominant1y for
creating public service jobs, with only very Iimited
Puerto Rico current1y receives "State-Iike" treat- amounts used for training purposes. It seerns doubt-
ment in the vast majority of Federal assistance pro- fuI !ha! these Federal programs, inc1uding those of
grams in which it participates. In several large and the Public Works Impact Program (PWIP) and the
important Federal programs, however, the treatment Local Public Works Program (LPW), will contribute
is different, i.e., less than that provided to the States. significaut1y to Puerto Rico's economic development
Consequent1y, tbe total amoünt oí Federal funds or have a long-lasting effect in reducing the chron-
Puerto Rico receives is less than it would receive if ically high unemployment leve!.
it were accorded State-like treatmen!. The disparate
distribution of Federal funds results from outright Increasing Labor Productivity
exdusion of the Commonwealth from a few Federal
programs, statutory Iimitations on sorne Federal allo- Increased labor productivity is considered a pre-
cations, and differing matching requirements for some condition to Puerto Rico's further economic develop-
of the programs that are based on cost sharing. mento Since there is an important connection between
Eight Federal social welfare programs are identi- basic education, subsequent occupational proficiency,
fied which accord differential treatment to Puerto and general labor productivity, the effects of educa-
Rico. In thecase of three, Puerto Rico is exc1uded: tional programs in providing better trained and tram-
(1) General Revenue Sharing, (2) Supplementary able workers are particular1y relevant.
Security Income (SSI), and (3) the Prouty programo By supplementing scarce Puerto Rican financial
In tbe case of the other five, the extent of Puerto resources, Federal funds help alleviate many deficien-
Rico's participation is limited: (1) Aid to Families cies in the Commonwealth's education system. Never-
with Dependent Children (AFDC), (2) Social Serv- theless, although total Federal funds to the Cornmon-
ices, (3) Medicaid, (4) Educationally Deprived wealth for educational purposes amounted to abaut
Children, and (5) Anti-Recessional Financial Assist- $244 million in 1977 and !he Federal Government
~nce (ARFA). Puerto Rico is also treated different1y
1 Alaska and Hawaii, noncontiguous States, receive interstate high~
In a few Federal programs more directly related to way funds.

15
provided a larger percentage of per capita pubJic FEDERAL ADMINISTRATIVE
education funds than on the U.S. rnainland, the AND REGULATORY ISSUES
present expenditures are considered inadequate in
terms of the island's needs and in view of the Jimited The impact of tbe Federal Government on Puerto
availability of Puerto Rico's own financial resources. Rico is not confined to that from the f10w of funds,
Moreover, sorne of the Federal assistance seems mis- but also results from: (1) administrative requirements
targeted; while Puerto Rico is still struggIing to sup- imposed as conditions for the receipt of sorne Federal
ply basic education many of the Federal programs funds; (2) poJicies of the Executive Branch relating
are aimed at providing extras. AIro, vocational and to prbgram deJivery and tbe exercise of statutory
technical education programs are inadequate in pro- discretionary authority; and (3) regulations applied
viding trained graduates for tbe island's increasingIy pursuant to Congressional mandates. Although these
technical industries. types of administrative regulations and poJicies also
affect States, Puerto Rico may be more strongly in-
Increasing Capital Investments f1uenced because of its island location, its unique
relationship to the United States, and the stage and
An inadequate level of capital investment is a
nature of its economic development. There are sorne
major impediment to Puerto Rico's current economic
indications that Federal policies do not adequately
development. Real gross fixed investment has been
dec1ining since 1972 and in 1977 was below the 1970 respond to Puerto Rico's needs.
From among the many Federal regulations and
leve!. There is also sorne evidence that Puerto Rico
policies applicable to Puerto Rico, five aspects are
has been suffering from decreased capital produc-
analyzed as being of majar importance to economic
tivity; the changing composition of investment, with
development: (1) tbe placement of Puerto Rico in
the public sector taking a larger share oí the total,
the Federal Regional system; (2) the incomplete cov-
may be a cause for this decline.
erage of Puerto Rico in Federal data collection ac-
Internal savings in Puerto Rico have been inade- tivities; (3) maritime regulations which limit the U.S.
quate to cover needed capital investment. Conse- maiuland-Puerto Rican trade to U.S.-owned, U.S.-
quently, the island has had to rely on external built and U.S.-operated ships; (4) the 1977 Amend-
sources, predominantly the United States. Although ments to tbe Fair Labor Standards Act, designed to
most of the investment funds have been provided by achieve mainland-Puerto Rican minimum wage par-
private capital, tbe Federal Government also provides ity; and (5) Federal environmental regulations.
sorne. Federal investment, primarily in the form of
long-term loans from Federal credit agencies, has Coordination of Federal Programs and
become increasingly important. In 1977 Federal Policies Through the Federal Regional
source investment amounted to 11 percent of total
System
gross investment in Puerto Rico, compared to 7
percent in 1970. In view of tbe substantial Federal impacts on
Only a limited portion of Federal funds for invest- Puerto Rico and tbeir pervasiveness, it would seem
highly desirable that there be considerable uniforrnity
ment, however, are used for what might be called
in the Federal mechanism for program deJivery. Yet
"directly productive" purposes, i.e., to expand pro- there is no such uniformity.
ductive capacity. Most of the loans and grants gen- Under the present Federal Regional system,
erally considered to be of an economic deve10pment Puerto Rico is included for most program purposes
nature (e.g., those of the Department of Commerce's in Region n, together with the U.S. Virgin Islands
Economic Development Administration) are directed and the States of New York and New Jersey. How-
toward infrastrncture investments which do not result ever, sorne of the more than 100 key programs which
directly in production increases. Thus Puerto Rico's disburse funds to Puerto Rico do not operate on the
scarce matching funds (for grants) and its borrowing island through Region n.
capacity (for loans) may be diverted from more im- Three alternative proposals regarding Puerto
mediately productive alternative uses. Rico's fut'~e program placement in the Federal re-
gion setup are discussed: (1) retention of program
The nature and levels of recent Federal invest- jurisdiction over Puerto Rico in Federal Region n,
ments in Puerto Rico are such tbat their mere con- with efforts to ensure that administration is fully con-
tinuation will not alleviate the Commonwealth's in- solidated in New York City; (2) transfer of Puerto
vestment problems. At the same time, however, any Rico from Region n to Region IV, which is based
sudden or large reduction in the f10w of Federal in Atlanta and inc1udes the Soutbern States; and (3)
investment funds could result in severe economic creation of a separate Federal Region for Puerto Rico
dislocations, especially in the construction industry. and tbe U.S. Virgin Islands.

16
Incomplete Coverage in Federal Data ping in foreign vessels), Commonwealth officials
Collection elaim that the island's shipping costs are unduly high.
U .S. vessel operators engaged in international trade,
Since the 1960's, Puerto Rican officials have ex- on the ather hand, receive shipbuilding and operating
pressed concern that their statistical inforrnation sys- subsidies to offset their higher costs in order to com-
tem has not been able to provide complete, reliable, pete with foreign-flag vessels. The issue of whether
and timely data on the economic and social condi- sorne offsetting subsidies should be provided for trade
tions of the Commonwealth. This situation has been between the U.S. mainland and noncontiguous States
aggravated by the rapid economic changes which and territories is oí ma jor concern to Puerto Rico.
have occurred since 1973. In the past, legislation has been introduced before
Deficiencies in the present system are primarily the Congress (H.R. 8836) to propose an operating
due to lack 'of Puerto Rican resources for all the subsidy for the noncontiguous States and territories,
necessary data collection and compilation activities but no action has been taken by Congress. From the
and the fact that Puerto Rico is generally accorded Puerto Rican viewpoint, however, shipbuilding subsi-
different treatment by, or is not fully covered in, Fed- dies are also considered essential since the present
eral data collection activities. As a result, the Puerto ships engaged in the U.S.-Puerto Rican trade are oId
Rican Government and the various Federal agencies and inefficient.
that administer programs under which funds are dis-
bursed are hampered by inadeguate data when for- Minimum Wage Regulations
mulating policy and planning objectives.
Puerto Rico was made fully subject to the Fair
Currently Puerto Rico is fully covered in sorne of Labor Standards Act (FLSA) at the time of enact-
the major data collection activities of the U.S. Bureau ment in 1938. However, with significant job losses
of the Census, but is completely exc1nded from or foIlowing the introduction of the federally mandated
incompletely covered in others. Moreover, sorne of minimum wages on the island, the Congress passed
the data on Puerto Rico are published later than an amendment in 1940 to allow Puerto Rican mini-
those for the United States and, in sorne instances, so mum wages to be set for individual industries below
late as to be considered outdated. the U.S. minimum. Periodic reviews were called for
There is c1early a need for an improved and by tripartite committees---<oonsisting of members
reliable data collection and information system cov- from labor, management, and the public sector-
ering Puerto Rico. The options for obtaining this- with the objective of gradually raising rates to the
at least for sorne important data series-are: (1) statutory U.S. levels. The FLSA (with several
extension of full coverage of Federal statistical pro- amendments in 1961, 1966, and 1974) has bee.1 an
grams to Puerto Rico, or (2) modification of exist- important wage-increasing factor in Puerto Rico,
ing Puerto Rican programs to comply with Federal although other factors have contributed to the nota-
standard s and methodology. It must be recognized ble wage increases which have occurred. The latest
that budget is a restraint in considering significantly amendment to the FLSA (May 1977) calls for fur"
revised coverage. Regardless of what is done with ther increases which will bring all but a small per-
respect to various current data series, it seems im- centage of Puerto Rican workers to the U.S. mini-
perative that Puerto Rico be given adequate consid- mum leve1 by January 1981. The FLSA also may
eration in current Federal efforts to improve, stand- have tended to equalize the distribution of Puerto
ardize, and design future statistical methods and Rican workers' income.
programs. One suggestion is for an interagency com-
mittee (chaired by the Office oi Federal Statistical Environmental Regulations
Policy and Standards in the U.S. Department of Com-
merce) to deal with Puerto Rico's special statistical Since the enactment of the National Environmen-
problems and needs. tal Policy Act (NEPA) in 1969, the Congress has
passed numerous Federal environmental laws. In
Maritime Regnlations each instan ce, Puerto Rico has been deemed a
"State," making it fully subject to these regúlations.
Puerto Rico is almost completely dependent on There is considerable concern over the adverse
maritime transportation for its external trade, of impacts that the water and air quality laws may have
which about 80-85 percent is between the island and on economic development particularly since many
the U.S. mainland. Since U.S. coastwise shipping physical characteristics, social priorities, and eco-
(cabotage) laws require service between U.S. ports, nomic factors in Puerto Rico differ from those of the
inc1uding those of Puerto Rico, to be carried on U.S. mainland. These environmental regulations, of
U.S.-built and U.S.- manned vessels operating under course, produce benefits as well as costs. For ex-
the U.S. flag (generally more expensive than ship- ample, the health and weIl-being of the Puerto Rican

17
people and the attractiveness of the island's tourist ation, within available prograrn constraints, to assist-
Índust ry are enhanced by sorne of the new safeguards. ing Puerto Rico with environrnental control costs;
In balancing costs and benefits, however, the (2) taking into account Puerto Rico's high energy
Federal Government would seern to have sorne op- costs and necessary reliance on petroleurn when ap-
tions tltat couId lirnit costs and still adequately rneet plying environrnental standards; (3) rnaking allow-
the needs of Puerto RicO'. The options could be car- ances for adequate study of alleged environmental
ried ou!: within the discretiO'nary limits and under the degradation by Puerto Rican industries (e.g., the rum
procedures allO'wed for by current environrnental industry) and providing irnplernentation tirnetables
reguIations. The options include: (1) giving consider- which do not unduly upset the island's econorny.

18
I
I PART THREE: SECTOR STUDIES
I
ij
,
f, This part 01 the Study 1 summarizes nine sector
reports which were primarily prepared by "teams"
"manufacturing" largely meant sugar production,
cigar-wrapping, or home cperations where house-

I~ 01 U.S. Government specialists lrom a number 01


agencies. In the caSe 01 Industry and Banking, how-
ever, outside consultants prepared the basic reports,
wives sewed gloves or sorne other articles 01 apparel
(Irequently precut on the mainland) on a piecework
basis. In encouraging industrial deve10pment the

I
¡
r
,\
which were then reviewed and revised by the Depart-
ment 01 Commerce. The nine complete sector reports
constitute Part Three 01 the overaIl Study.
Puerto Rican Government first undertook the build-
ing and operation 01 publicIy owned plants, mainly
utilizing local raw materials. By the late 1940's, how-
;iJ IncIuded in each 01 the summaries provided here ever, the Government's strategy locused on attracting
ifl are: (1) an overview 01 the sector; (2) a statement outside investors to establish plants to produce lar
the mainland market. The advantages of Puerto
indicating the impact 01 Federal programs and poli-

,I
,I,
I
cies; (3) identification 01 the major problems; and
(4) a briel discussion 01 policy and program options
lor Federal and Commonwealth Government consid-
eration. Each summary, based directly on a luIl
Rico's position within the US. customs union and its
significant lavorable wage rate differential in respect
to the U.S. mainland-two encouraging lactors lor
attracting mainland capital-were augmented by a
sector report, rellects the basic analysis and the views comprehensive tax exemption program coordinated
expressed in the corresponding sector report. The with the advantage 01 special U.S. tax status. A new
agency-the Economic Development Administration

I
sectors reports summarized are:
(Fomento)-was created in Puerto Rico to coor-
Industry dinate and promote industry. An inllux 01 U.S.-
Agriculture, Food, and Rural Living owned subsidiary plants brought in raw materials
Tourism and technology to produce textiles, apparel, and sorne
Housing and Construction electronic parts. In the 1960's there was a growing
Transportation emphasis on the use 01 heavier equipment and devel-
Energy opment 01 capital-intensive industries, especially pe-
Commercial Banking troleum refining and the processing 01 petroleum
Employment, Wage Structure, and Migration byproducts and petrochemicals that serve as raw
Social Conditions and Human Services materials lor othet products. Petrochemicals and
later pharmaceuticals and scientific/prolessional in-
struments became the high growth core 01 the manu-
INDUSTRY lacturing sector.
Overview In attaining its prominence in the Puerto Rican
The industrial 2 sector is the leading contributor economy, the manulacturing sector underwent exten-
01 income and employment in Puerto Rico. In 1977 sive changes and growth alter the 1940's when the
Puerto Rico had more than 2,500 manulacturing Government took up the industrialization strategy.
plants which employed 154,000 workers. Net income The expansion of the sector is impressive-whether
from manulacturing that year was $2.8 billion, ac- measured in terms 01 net income, employment, or
counting lor over one-third 01 the island's income. profit. Income from manufacturing grew at an annual
Net profits in the same years amounted to abaut $1.7 rate of almost 14 percent, compared with a 10-per-
billion or about 80 percent 01 total private profits. cent growth rate for the economy as a whole. Where-
The emergence 01 manulacturing as a major con- as in 1977 manufacturing accounted lor more than
tributor to fue Puerto Rican economy resuIted Irom one-third 01 net domestic income, in 1950 it provided
the Puerto Rican Government's strategy 01 economic only 15 percent. Employment in manufacturing in-
development launched in the 1940's. Belore 1940 creased more than two and one-hall times between
1950 and 1977-from 56,000 to about 145,000.
1 "Study" refers to tbe whole Economic Study 01 Puerto Rico. The 1974-75 recession adversely affected Puerto
\! The tenns "industrial" and "manufacturing" are used inter·
changeably in this sector study. Rico's manufacturing sector as it did the entire

19
economy. However, data for 1977 and preliminary Table 1.-Industry Group Contributions to lncome,
data for 1978 indicate a substantial recovery in man- Employment, and Output in 1977
ufacturing. The sector's output for 1977, for example, (Percentage of manufacturing ;sector total)
exceeded that of 1976 by 16 percent. Income rose
Income
even more-about 19 percent-and employment in- (labor Employ- Output
Industry group mcome) ment CGDP)
creased by 11,000 in 1977 and 12,000 in 1978.
Although the Puerto Rican administration which Apparel ' _____ ' _____________.. _. __ .__._._ 16.4 25.1 8.3
Electrical machinery __________________ _ 11.1 9.4 12.9
took office in J anuary 1977 has not ful1y articulated Food products ..._______.. ____________ _ 11.0 9.2 9.1
its economic poli des and programs, major changes Phannaceuticals ... _____________________ _ 8.6 6.5 26.5
Instruments _.... _____._.. ______ .. 6.3 8.3 4.9
have been effected in the manufacturing sector, par- Stone, cIay, glass ...._.., ______.. _______ _ 4.3 3.6 2.6
ticularly in !he Industrial Incentives Act (HA). More Petrochemicals _" _________ .. ____ . 4.1 3.0 7.4
Nonelectrical machinery _........._ 3.9 3.4 3.9
emphasis will be given to certain other sectors such Petr~Ieum ._,_.._________ ._____ _ 3.9 2.6 3.2
as agriculture and services than in the past; this shift Fabncated metaIs _______ .___ _ 3.2 2.6 2.2
Printing and publishing 2.7 1.8 1.1
will tend to detract somewhat from !he focus on man- Tobacco ...._..._......_........_...___ ..._..... 2.4 2.1 3.8
ufacturing. Although significant tax exemption is to Textiles ............_..._____._... _. ______ _ 2.3 3.2 1.4
Rubber and plastics _________.._.. . 2.3 1.6 1.4
remain a feature of the Commonwealth development Sugar ______._____...._._ ...._.._.............. . 2.3 1.9 0.2
Leather products ......_......__.._.. __ 2.1 3.8 1.0
policy, complete exemption for new investment is Soft drinks ...__________ .__ _ 2.0 1.6 1.8
eliminated under the 1978 incentives legislatiori. Wood and furniture .................... 1.8 2.6 0.9
Alcoholie beverages .._..._. _____ . 1.7 1.4 6.1
Other chemicals ______ .__...__.._._..__ 1.7 1.3 0.9
Beer _______ .... _.._......._..._......._._._ 1.3 1.1 0.9
MAJOR FINDINGS Paper and paper products
Primary metals ..... _......__. ____ . __ _
1.0
1.0
1.2
0.8
0.6
0.4
Transportation equipment .......... 0.4 0.1 0.2
The 11 chapters and several appendices com-
Note: Listing is in order of rank in contribution to ineome.
prising !he full report on the industrial sector provide
comprehensive analyses of the growth and changes
of capital since domestic saving is insuffident to
in Puerto Rico's manufacturing, its competitiveness,
support investment and government expenditures.
import substitution, and industriallinkages. Also dis-
cussed are Puerto Rico's industrial incentives pro- '. Puerto Rico's manufacturing sector appears vule
grams, the effect of U.S. tax and foreign trade poli- nerable to cyclical changes in business conditions in
des, and the impact of Federal assistance programs the United States. Despite the fact that in the late
on the Commonwealth's industrial development. An- 1950's and 1960's attempts were made to attract
alytical profiles of 17 separate industry groups and industries thought lo be less subject to cyclical
a number of subgroups are presented in appendix B. changes, the cyclical vulnerability of the sector re-
The most important findings of the detailed analyses mains. Moreover, the new core industries which arose
are summarized below. in !he 1960's-petroleum refining and related petro-
chemical manufacturing-have proved sensitive to
General Characteristics of the other unanticipated outside forces as well, the most
Manufactnring Sector extraordinary of which is the rapid rise in crude oi!
prices resulting from the OPEC price changes starting
• By the 1970's Puerto Rico's manufacturing had in 1973.
become fairIy diversified compared to earlier years.
The sharpest gains in income and employment within
the sector in recent years occurred in the more capi-
Competitive Position
tal-intensive industries such as chemicals, electrical • Puerto Rico's earlier competitive advantage of
machinery and equipment, and sdentific and profes- lower wages than on the mainland dec1ined somewhat
sional instruments. However, the more traditional through 1970 because of accelerated wage rate in-
labor-intensive industries continued to be an im- creases. Since 1970, wages in Puerto Rico have not
portant element of the sector. Labor~intensive manu- moved significantIy relative to the mainland average.
facturing accounted for more than half of the sector However, energy and transportation cost increases
employment as of 1976 but generated lesser shares have greater impact on industrial location in Puerto
of sectoral income and Gross Domestic Product. Rico than on the mainland. The differential in the
Table 1 arrays the various manufacturing industries overall rates of cost increases allowed Puerto Rico
by their contributions to income, employment, and to remain cost-competitive with mainland operations
output in 1977. in many types of manufacturing.
• Income from manufacturing in Puerto Rico is • In sorne labor-intensive industries Puerto Rico
less than commensurate with the sector's output. This appears to suffer from a wage-cost disadvantage com-
is mainly due to the heavy reliance on outside sources pared to developing countries, inc1uding Latin Amer-

20
ican economies. But other factors favor U.S. invest- capture through taxation sorne portian of the re-
ment in puerto Rico relative to such countries; these patriated earnings. The tax on repatriated earnings is
factors include Puerto Rico's tradition of political the "tollgate tax."
stability; the duty-free entry of its products into the
• Other Puerto Rican Government incentives, al-
U.S. market; and the relatively well-trained and
though less important, have aided industrial develop-
stable workforce. ment. These include worker training and other tech-
nical assistance, the construction and subsidized
Industrial Linkages rental of industrial buildings, capital grants for sorne
new plants, and loans from the Government Devel-
.• The subsidiarles of U.S. companies largely re-
opment Bank and the Puerto Rican Industrial De-
sponsible for the impressive growth of Puerto Rico
have primarily used the island as a production point, velopment Company (PRIDCO).
bringing in raw materials and intermediate goods
while shipping the output directly to their mainland Sources of Investment
parent companies for distribution. This routing has • Investment sources have been largely externa!.
resulted in limiting to a great extent the growth of About 90 percent of Puerto Rico's industry has been
linkages between manufacturing industries in Puerto financed by U .S. mainland firros.
Rico.
• It appears in view of the lack of Puerto Rican
'. Puerto Rico's relatively poor distribution system capital formation that future manufacturing develop-
probably encourages U.S. firros to rely heavily on ment will continue to depend very heavily on capital
their parent companies, adding to the difficulties of inflows. Such inflows rest heavily on continued facili-
maximizing the number of industrlallinkages. tation by Federal tax policies.
• Increased income generation, primarily a func-
!ion of such factors as the nature of specific manu- IMPACT OF FEDERAL PROGRAMS
facturing industries and increased linkage and multi-
plier effects, can be important in providing greater
AND POLlCIES
potential for Puerto Rican revenue.
The Federal relationship is important in.many
respects to the development and future of the manu-
Import Substitution facturing sector. When Puerto Rico's development
'. Given appropriate policies, carefully selected strategy was adopted in the 1940's the free trade
import substitution products can be promoted to in- relationship was the most important aspect. Over the
crease the value-added on the island and to reduce years, however, other policies and programs hav~
leakage of potential savings to other areas. become increasingly significant.

• Puerto Rican imports, especially those from the Tax Policies


U.S. mainland, appear to contain a number ef items
which can be efficiently produced in Puerto Rico. Prior to 1976 section 931 of the U.S. Internal
Among the manufactured products holding promise Revenue Code provided that a subsidiary of a U .S.
for import substitution are beer, bakery products, firm investing in Puerto Rico could qualify as a
manufactured milk products and rubber tires and "possessions corporation" and thus exclude from
tubes. Federal taxation the income from its Puerto Rican
operations. Moreover, the possessions status allowed
a "Section 931 corporation" based in Puerto Rico to
Investment Incentives enjoy tax exempt[on on income from possessions
sources other than Puerto Rico. Coupled with Puerto
• Puerto Rico's Industrial Incentives Act (HA)
and the related U.S. tax concessions provided under Rico's incentive program that provided exemption
the Internal Revenue Cede have been powerful in- from Commonwealth taxes, the possessions corpora-
ducements for U.S. firms to locate in the Common- tion treatment provided by the U.S. Internal Revenue
Code was an important factor in the location of
wealth. The nature of the industries recently locating
there suggests that tax concessions may be a signifi- industry in Puerto Rico. The 1976 U.S. Tax Reforro
cant factor in the decision tolocate in Puerto Rico. Law under section 936 made a number of changes
relating to "possessions corporations," inc1uding the
• The 1976 change in the Federal tax code allow- elimination of the tax exemption from sources out-
ing possessions' corporations to repatriate dividends side Puerto Rico. It also provided a tax-free status
free of U.S. income tax on a current basis should for dividend repatriations made at any time during
indirectly benefit Puerto Rico by permitting it to the life of section 936 corporations. This provision

21
gave the Puerto Rican Government the opportunity direct effects are pervasive. Transportation, com-',
of gaining revenue by imposing a "toIlgate" tax of munications, power, and other facilities used by the '1
10 percent on earnings in Puerto Rico that were manufacturing sector have received support under a j
repatriated to the mainland by the parent companies. number of Federal programs. Federal assistance in -
the education area, particularly through the financing .,
Wage Policies of special training programs, has been a helpful but
indirect support to industry.
Special Federal provlslOns in the Fair Labor
Standards Act allowing minimum wages for Puerto
Rico at levels lower than on the mainland constituted MAJOR PROBLEM AND
an important factor in the establishment of new man- SURROUNDING QUESTIONS
ufacturing plants, especiaIly in the more labor-inten-
sive types of production. Recent amendments of the The basic problem regarding Puerto Rico's manu- .
Fair Labor Standards Act, which will bring almost facturing centers on the choice of an overaIl strategy
aIl industries in Puerto Rico up to the U.S. minimum which will aIlow this key sector to continue growlh
wage level by January 1981, may have adverse in such a way as to provide maximum benefit to
effects on sorne manufacturing enterprises where Puerto Rico.
labor productivity growth relative to competing pro- Several significant questions must be answered in
ducers cannot offset to sorne extent the increase in choosing the correct policy strategy. These inc1ude:
wage rates. The gradual displacement of these indus- (1) How can the recent uptrend in manufacturing
tries by more competitive industries is taking place, output, income, and employment be continued or
but the process wiIl take time. possibly accelerated?
(2) How can an adequate flow of external invest-'
Foreign Trade Policies ment-critical for industrial development-be main- 1

U.S. foreign trade policies are significant for taif;~kow can the income generation of investment j
Puerto Rico in several ways. Particularly important for the island in manufacturing be increased? .'
are those policies that reduce U.S. barriers to the (4) How can the competitive position of Puerto ¡i
importation of goods from developing countries when Rican manufacturing industries be maintained or im- ·1,
the same or similar goods are produced in Puerto proved? ,¡
Rico. In such instances, if Puerto Rico's competitive (5) How can the risk of vulnerability to changes :1
edge is smal!, Puerto Rican production may be in external circumstances and Federal Government)
severely reduced or completely eliminated. On the policies be reduced? "
other hand, U.S. success in obtaining reduction of (6) What kinds of industries should be promoted J
foreign trade barriers to goods which are being or by the Puerto Rican Economic Development Ad- j
could be competitively produced in Puerto Rico ministration? ~
opens new opportunities for Puerto Rican manufac-
turing and export. A reduction in U.S. import restric- Puerto Rican Govemment Options i
tions also may reduce costs of goods imported into
Puerto Rico, which in the case of raw materials or Puerto Rico is confronted with the need to com-
pete for markets on the mainland and e1sewhere with!
i
capital equipment may reinforce the competitiveness
of particular products produced in Puerto Rico. producers able to offer lower costs and belter access,j
to technology. This means governmental policies n
must be sensitive to the types of industries drawn to ¡¡
Federal Assistance Programs the island and the benefits the economy will derive,!
In addition to the major influences resulting from from the industry's island location. The Study out-:I
Federal tax, wage, and foreign trade policies, a num- lines various criteria that the Government can utilize '1
ber of Federal assistance programs affect Puerto to evaluate the industry's importance to the island. :'1
Rican industry directly and indirectly. Among the criteria are: long-term competitiveness, . . .¡I
The programs which have direct assistance avail- technology, employment, revenue potential to the:
able to Puerto Rican industry inc1ude grants and island, upgrading of labor force skill levels, linkage Ti
loans provided by the Department of Commerce to other island industries, and efficient import sub-il
through the Economic Development Administration, stitution potential. Any growth strategy envisionedil
the Farmer's Home Loan Bank business and indus- by government officials should involve these criteria.¡¡
trial loans, HUD's Housing subsidies, and various Industries altracted to the island embody differeiIt'¡
loans provided by the SmaIl Business Administration. degrees of factor combinations. To sorne extent, thel
While the total direct effect of Ihese and other pro- factor combination determines the level of benefits,i
grams on Puerto Rican industry is modest, the in- obtained by island factors. In evaluating the benefit . ~
ji
22 )1
j
levels of each industry, government officials can income would be increased. Also, Puerto Rican in-
establish policies that reflect the technology and vestors would be provided a greater scope of in-
factor combinations that are important to the island. vestment opportunities since the smaller capital re-
policies could be constructed to maximize the per- quirements would allow more local participation in
ceived benefits of target industries. ownership. Under such a strategy lhe gap between
Industries, for example, with relatively high cap- GDP and GNP would tend to narrow. The economy
ital/labor (K/L) ratios may bring with them a com- would become somewhat less vulnerable to changes
petitive technology, betler labor training and local in Puerto Riean-U.S. Government relationships.
management opportunities, the ability to pay higher Among the disadvantages of this policy orientation
wages, and a long-term competitive advantage. The are: (1) labor-intensive industries lend to offer less
industries may, however, not utilize fully the island's promising prospects for market growth than other
abundant factor input. Clearly, the industrial com- industries; (2) necessary supporting actions, which
position will alter the benefit level available to the would be required in the form of s.ubsidies and pos-
island in the short term, but given appropriate poli- sibly changes in the minimum wage legislation, may
cies the long-term benefit to the island could be be diflicult to achieve or even undesirable; (3) the
manifested in a modern, high technology, more com- shift in emphasis might cause business reluctance
petitive industrial structure. regarding or eVen discouragement of sorne planned
On the other hand, industries with relatively low capital-intensive investment; (4) skill upgrading of
K/L ratios may, in the short term, use the island's workers would tend to be more limited as would
more abundant factor input and, thus, alleviate im- overall real wage increase; and (5) prospects for the
mediately certain economic pressures. To remain development of linkages with other local industries
important island industries over the medium term would probably be more limited.
the competitiveness of these industries will depend on Several programmatic approaches are discussed in
improved technology and upgrading output to meet the sector report as worthy of consideration by the
changing consumer tastes. Puerto Riean Government:
The first emphasis---on attracting industries with (1) Adoption of a minimum profits tax for man-
relatively high K/L ratios-which essentially follows ufacturing companies.-This option suggests an ap-
Puerto Rieo's current policies, has several advan- proach to retain "promoted" firms on the Island
tages. Mainland investors are aware of it and new once their original tax exemptions have expired.
industries are taking an interest in Puerto Rico. The Under this approach, rather than extending exemp-
policy provides a means of upgrading present em- tions to new product lines-or facing plant dosures
ployee skill levels. Also, it would in time enhance -the Puerto Rican Government could apply a mini-
opportunities for increased linkage effects with other mum corporate tax on profits.
Puerto Rican industries. If successful, it would pro- (2) Adoption of a differentiated incentives system.
vide a strong base for expanding Puerto Rican reve- -In place of the present incentive policy, whieh
nues through the taxation of corporate profits. makes few distinctions among the various types of
While providing these beneficial aspects, at the manufacturing, Puerto Rico may wish to introduce
same time this policy has sorne distinct disadvantages. a subsidy policy with varying incentives depending
These indude: (1) relatively limited initial employ- on the types of industries that are considered desir-
ment impact; (2) a possible long-run tendency of con- able. Such a system is outlined in the report and the
centrating Puerto Riean income in the hands of a additional data needs for its planning and operation
relatively small but skilled labor group; (3) a heavy are discussed. The choice of particular industries to
?ependence on tax exemption measures in attracting receive specially favorable treatment would reflect
mflows of investment capital; (4) considerable vul- the basic industry strategy option chosen.
nerability to any change that might occur in the (3) A doption of a limited import substitution pro-
nature of the Puerto Riean-U.S. Government fiscal gram for manufacturing industries.-Although the
~elati~nships; and (5) the corrolary to foreign cap- main emphasis under policy formulation would be
ltal-mcreased foreign ownership--would cause a on export-oriented industries, there may be oppor-
widening of the gap between gross domestie product tunities for Puerto Rico to increase local production
and gross national product. of selected items which would be intended for local
~n contrast, industries with relatively low K/L consumption.
rabos can bring greater immediate employment im-
p.acts. An emphasis on them is more directly respon-
Slve to the problem of high unemployment and would Federal Government Options
tend to build a manufacturing sector consistent with Aside from the "Possessions Corporation System
Puerto. Rico's abundant labor which is relatively in- of Taxation" under the Internal Revenue Code, the
expenslve compared to the U.S. mainland. Labor only Federal programs of a direct snpport character

23
devoted to industrial development are several loan plantations on the more fertile coastal plains, not only
funds whose limited resources are drawn upon for dominated commercial agriculture but also the Com-
projects in States and territories alike. Continuation monwealth's economy. Tobacco, grown mostly in the
of the present exemption from Federal income tax of mountain valley of the wetter north slopes, and coffee
repatriated dividends from Puerto Rican enterprises, grown on the mountain slopes constituted secondary
however, is virtually a sine qua non for attracting profitable commercial crops.
more U.S. inveslment capital to Puerto Rican in- Over the years sugar production has dec1ined and
dustry. in several recent years, despite subsidies, this high
Other Federal programs affect the manufacturing cost industry has registered heavy losses. Coffee now
sector indirectly. They are primarily re1ated to other occupies about the same acreage as sugar, but its
sectors. For example, there are programs assisting in production is considered inefficient. Tobacco produc-
the construction of infrastructure, improvement in tion, despite subsidies and incentives, has not been
housing, health, and education, and providing train- profitable and the Commonwealth Government plans
ing. The Federal Government's use of these programs to phase out production. Pineapple production and
is covered in other sector reports. processing under the Puerto Rican Land Authority
Several general Federal actions considered to be has also had large losses in recent years.
particularly helpful to Puerto Rico's future industrial Since the mid-1960's, the agriculture sector has
development, however, are considered by the Manu- shifted toward greater diversification and cornmer-
facturing Sector Study. These include: cialization in the production of milk, poultry, eggs,
1. The elose coordination of Federal programs beef, and pork and away from "traditional" crops.
with Puerto Rican industrial priorities. By 1976, this "livestock products" category account-
ed for 53 percent of the total agricultural product
2. Full recognition of the impacts on Puerto Rican
value while the "traditional crops" accounted for
industry in the making of U.S. trade policy decisions.
only 16 percent.
3. To the degree possible under statutory limits, Reliance on imported foods has increased greatly
the making of allowances for differences between over the years as lhe growth in population has been
Puerto Rico and the U.S. mainland in applying regu- faster than that of food production and as farmers
latory requirements. have moved to urban centers. By FY 1976 imports
4. Provision of assistance to Puerto Rico in review- of food products, valued at $1 billion, amounted to
ing its economic data gathering, research, analysis, more than 60 percent of the Commonwealth's ex-
and reporting systems. Also, increased efforts to in- penditures for food. Local production in 1976 ac-
elude Puerto Rico in U.S. statistical series where it counted for only 65 percent of the island's consump-
is not now fully inc1uded.
tion of starchy vegetables (plantains, yams, cassava),
40 percent of the garden vegetables, 10 percent of
AGRICULTURE, FOOD, AND the legumes, and 25-30 percent of pork, beef, and
RURAL LIVING 3 poultry.
Since 1974 Puerto Rico has relied heavily on the
Food Stamp Program, with abollt half of the families
Overview on the island using food stamps in 1976. Together
From being the predominant sector in the 1940's with other food programs (e.g., school lunches),
and 1950's, agriculture has dec1ined to become the Puerto Rico received aid amounting to about $630
smallest of Puerto Rico's major economic sectors. million in 1976.
Even as late as 1960 employment in agriculture ac- In the past several years the Puerto Rican Depart-
;1
counted for 24 percent of total employment. By ment of Agriculture's annual operating budget of
i 1977, however, it employed only 6.5 percent of the about $50 million has provided subsidies (to farmers
work force and contributed only 6.5 percent to the producing traditional crops), development incentives,
I formation of GNP. and agricultural services. Despite these expenditures
I In the 1940's and 1950's Puerto Rico's agriculture the overall agricultural situation has shown no
I had a dual structure-the production of sugar, coffee,
tobacco, and pineapples as commercial crops and the
marked improvement. N evertheless, agriculture has
been sustained, the sugar industry is still operating,
I subsistence production of various vegetables and and significant strides have been made in livestock
I fruits by large numbers of small-scale farmers who and poultry output.
Puerto Rico's agricultural marketing structure-
I generalIy eked out a poor living. Sugar, grown on
:1 The report on tbe agricultural sector analyzes Dot only agricultura!
production, but a150 foad consumption and rural living conditions.
both in serving the domes tic and export trade-has
serious inefficiencies which complicate efforts to ac-
The emphasis in this surnmary is on production and distribution, but
includes these other aspects, sorne of wruch are a150 touched upon in
celerate commercial agricultural production.
other sector reports. Puerto Rico lags far behind the mainland in intro-

24
ducing and spreading modern agricultural technology. FY 1970 and 1976; its projects more than doubled
In part, this appears to be due to lack of energetic between 1976 and 1978 to reach $224 million in
government efforts in experimental and extension the latter year. This agency's largest expenditures are
work, but it also reflects the lower educational levels in providing housing loans; but loans and grants for
and older age levels of Puerto Rican agricultural such community services as "water and waste" and
workers when compared to mainland agricultural "community facilities" (e.g., health service, parks)
workers. are also of importance.
Rural living conditions, although improved over
I
I
the las! several decades, are considered deficient in
several respects. In particular, much of the housíng
Major Problems
is "inadequate," i.e., not up to minimum U.S. stand- The agriculture sector has many pro blems, sorne
"
I
I ards. Waste treatment is deficient and the limited of them indicated in the preceding "Overview." Two
I telephone facilities of lhe rural areas, combined with basic issues stand out, with many les ser problems and
!
¡
the lack of islandwide communications, are a con- issues subsumed under these:
straint on the development of rural businesses. Also,
in many of the mountainous areas of the island, (1) What is the best agricultural strategy for Puerto
where agriculture is most difficult, opportunities for Rico to efficiently use its resoUl~ces-land, water,
j labor, and capital-so as to raise the current produc-
other employment are extremely limited.
tion leve! of food products, primarily to decrease
heavy reliance on imports but also to provide revenue
Impact of Federal Programs from exports?
Federal programs provide a limited amount of (2) What sort of rural development program might
program assistance in the field of agricultural produc- Puerto Rico consider, under present general budget
tion, large sums in the form of food stamps and other constraints, to improve living conditions for the rural
food programs, and sorne funds-mostly in the form population and to provide a be!ter base for locating
of home ownership loans and "water and waste" businesses in rural areas?
loans and grants-aímed at assisting the improve-
ment of rural living conditions. Important !esser issues-related to the above-in-
In the field of agricultural production and general elude the following:
agricultural development, the U.S. Government pro- (1) What steps can be taken to increase the pro-
vides: Financial aid for research at the Agricultural ductivity and improve the output of small farmers?
Experiment Stations at Mayaguez and Rio Piedras
and the Mayaguez Institute of Tropical Agriculture; (2) What steps can be taken to betler deal with
more than 60 percent of the funding of the Common- land and water shortages being experienced in sorne
wealth's Agricultura! Extension Service; funds and agricultural areas?
personnel for food inspection; ftínds for insect and (3) What can be done to develop a mOre effective
disease control; and funds for price supports for agricultural marketing structure?
sugar. (4) What steps can be taken to increase the effec-
The major U.S. funding is in the various food pro- tiveness of the food assistance programs?
grams which amounted to about $630 million in
1976. Although it is basicalIy a welfare program Program and Policy Options
¡ rather than an agricultura! program, lhe impact of
the food stamp program has been fe!t in alI sectors.
The large infusion of spending made possible by
Tbe Basic Slrategy Opti()JIs.-The Agricultural
Task Force which prepared this sector report an-
food stamps after 1974 increased consumption of alyzed three agricultural production strategies for the
food products in the rural areas as well as in the 10 years 1979-88. Each strategy would require the
cities. Although most of the increases came from coordinated effort of the Commonwealth and Federal
accelerated imports, sorne were from local sources, Governments to achieve the production, employment,
especialIy in the case of mi/k and, to a lesser extent, and land use goals. Each calls for a different mix of
meat and poultry. governmenta! programs and a different level of fund-
Federal programs for agriculture and the rural ing.
sector provide funds designed to assist in rural hous- The main features and problems oí the three strat-
ing, community facilities, business and industry, elec- egies-called "continuation," "free-market," and
trie and telephone facilities, and technical assistance. "action"-are described briefly in the accompanying
In Puerto Rico, the most significant are those of the table. The table also provides estimated costs and
Farmers Home Administration which increased its expected levels of farm employment and income by
obligations in Puerto Rico almost tenfold between 1988 compared wilh 1976.

25
Summary of Three Alternative Agricultural 8trategies
I
t
¡

Item 1976 Continuation


Alternative strategies to 1988 1

Free Market Action 2 I


I
Farm employment
(thousands) 46.0 42.0 34.0 45.0
Fann income
(millions of dollars):
Gross _________ 410.7 549.3 461.4 625.5
Net '.____________ 82.1 92.6 44.7 64.3 ~
N et afte! deducting
subsidies, wage
¡
¡
supplements, and
losses from gav- [
eroment opera- ¡
tions .__...___._.____ 40.4
Government costs
25.6 25.7 50.3
!
(millions of dollars):
Commonwealth Gav- f
ernment . ______._" 146.6 91.9 (1,154) 42.0 (927) 44.2 (1,102)
Federal Govern-
ment _____________ 17.0 14.0 (140) 19.3 (176) 22.5 (228)
FrnHA fann produc-
tion loans ' _ _ '___
Ratio of value added by
island agriculture to
7.0 7.0 (70) 50.0 (500) 50.0 (500)

i
Cornmonwealth and
Federal program costs_ 1.85 4.07 5.55 6.83
Credit needs
(millions of dollars) _ 200.0 200.0 240.0 300.0
Main features of strategy _____ .__ _ Stresses social objectives, con-
tinuing subsidies to 10wRin~
Reduction oi subsidies to 10w-
income fanners producing tra-
Aggressive acceleration of com-
mercial production by smalI- f
I
come farmers producing traro- ditional crops, wage supple- scale family farms and phase-
tional crops, and wage supple- ments to agricultura1 latorers, down oi the various income· r
ments to agricultura} laborers. and incentiyes for ¡>roduction support programs.
Slow decline in agricultural services. Sugar industry to be brought to
empIoyment. Emphasis on increased govern- a no~loss position.
Continues government agricul~ ment assistance in research, Development of rice production
tural processing operations, but extension, and marketing as~ on 50,000 acres, expansion of
attempts to reduce Iosses, es~ sistance programs. coffee production and of froit
pecially in sUgar operations. Sugar operation would go ioto and vegetable outputs.
bankruptcy. Production of live~ Greater emphasis on forest lrnR
stock would decline. provement and protection.
Provides for development of rice Provides for increased- govem-
production on 25,000 acres. ment assistance in research,
extension, and marketing as-
sistance programo
Major problems associated with
strategy _____......_... ,. __.___._________ _ • Very costIy to Commonwealth • W ould call for 15 percent in- • Plan should systematically as-
Government. By 1988 Common~ crease in Federal program costs sess marketing needs for the
wealth costs would be reduced, plus a sevenfold increase in proposed production strategy.
but stm high (more than dou~ Farmers Home Administration Federal Government costs
ble those of other two alter· production loans (in arder to would be substantial1y in R
natives). finance certain agricultura! re· creased inc1uding sevenfold in R

development and to avoid fur- crease in Fanners Home Ad-


ther collapse). ministration production toans
Net income to fanners would and large rice production costs.
be markedly reduced_ • Production shortfaIl and cost
overruns are a distinct possi R
bility.

1 The figures without parentheses are 1988 budget estimates; those in parentheses are cumulative amount for the 10 years 1978 88. R

2 Program reflects adjustments to a study developed by Puerto Rican Secretary of Agriculture.


Note: All dollar figures are in 1976 dollars.

Regardless of which basic strategy is decided upon offer promise in making the present Federal foad
-one of these three or sorne other possible modifi- programs more effective. These inc1ude: (1) improv- n
cation-Puerto Rico has sorne secondary options ing the management of the programs at the local Ir
which will help increase agriculture productivity. level; (2) authorizing the use of food stamps in farm-
These relate to the betler use of research funds and ers markets (which could assist in getting locally
improvements in agricultural extension. In particular, grown food in commercial channels and encourage
it is noted that administrative costs in both the Ex- increased production); and (3) expanding the use of
periment Stations and the Extension Service are un- the WIC program (supplemental food program for
usually high and that farmers have not kept pace women, infants, and children) which is not reaching
with technological advances such as the use of fertil- many who are eligible.
izers and the treatment of animal and plant diseases.
Rural Living Conditions.-Improvement of rural
Food Programs.-There are several options which living conditions is constrained by the severe limita-

26
tions 01 economic opportunities in the countryside. In 1977 sorne 1,376,000 persons visited Puerto
Families wíthout jobholders and with very low in- Rico. They stayed an average 01 4 days and spent
comes find the loan and guarantee programs lar a total 01 $424 million. Since each tourist dallar
housing, lor example, 01 little help. However, sorne has a multiplier effect the actual income generated
options are identified. Among the more promising was several times larger than the expenditure figure.
are: (1) an increased use 01 the Farmers Home Ad- Moreover, the indus!ry is labor intensive providing
ministration's section 504 and section 502 housing a larger proportion 01 employment than the expendi-
loan lunds; (2) possible alteratÍon 01 U.S. minimum ture figures suggest. In 1977 employment generated
property standards lor housing to reflect "local ac- by visitar spending was estimated at more than
ceptable standards" (which would permit better tar- 80,000 or about 11 percent 01 total employment.
geting 01 the available Innds to meet the greatest
needs and also make the lunds go larther than under
the present standards). IMPACT OF FEDERAL PROGRAMS
AND POLlCIES
Rural Business Development.-Options aimed at
improving business development in rural areas in- As in the case of other sectars, numerous Federal
elude increased use 01 the Farmers Home Adminis- pragrams and policies affect Puerto Rico's tourism
tration's "Business and Industry" loans and possibly industry, directly or indirectly. Five 01 these, con-
Small Business Administration loans. In particular, sidered as having direct and important impacts on
use 01 these lor establishing agricultural marketing the tourism situation, are summarized here.
businesses such as storage and processing operations
would be helplul since the present agricultural mar- Air Transportation Policies
keting is deficient. Previous U.S. air transportation policy had limited
Other rural development options concern the im- the number of centers in the United States with direct
provement 01 water supplies, electrification, and tele- fiights to San Juan, and restricted the certification
phone services. These inelude: (1) revising the ac- of airlines on existing routes. The Commonwealth
counting records 01 the Puerto Rico Aqueduct and Government has sought to add additional cities for
Sewer Authority, which should lead to more effective direct service to Puerto Rico and more airlines to
use 01 Farmers Home AdministratÍon's loans lar operate on the existing routes. Such changes, in
sewer and water lacilities in rural are as; (2) increas- the view 01 Puerto Rico, would increase tourism.
ing Commonwealth expenditures lor telephone lacil- Within the past year, there have been awards of
ities; and (3) stepping up 01 planning and leasibility additional service routes to Puerto Rico and new
analyses so as to take advantage 01 Federal grant airlines have entered the marketplace. Also, sched-
programs coming available lar public works (EDA) uled service has begun to Borinquen Airport, in
and rural roads (DOT). the western part 01 Puerto Rico, which should aid
tourism development in that area.
TOURISM There are other proceedings pending concerning
Overview air service in the Caribbean area, inc1uding Puerto
The tourism industry in Pnerto Rico is a majar Rico, which could expand air service and glve an
income earner-second only to the manulacturing impetus to tourism in that area.
sector in 1977, il government is omitted as a sector. The Commonwealth has also been concerned
Tourist expenditures currently represent over 5 per- about the rise in air lares to Puerto Rico over recent
cent 01 the total Puerlo Rican GNP. years, leeling that the island's stature as a low-cost
During the 1950's and 1960's the industry's growth destination in terms of air lares has been eroded.
was rapid, with the number 01 tourists increasing The recent and potential infiux 01 broader ánd
i Irom 65,000 in 1950 to 1.1 million in 1970. The more competitive air service should provide a mar-
ketplace incentive for innovative and economical fare
ii fiourishing tourism industry by 1970 had numeraus
modern hotels along the beach front 01 metropolitan
San Juan and more than 7,100 rooms available in
polícies in accordance with current U.S. aviation
policy, and also an additional incentive to promote
all 01 Puerto Rico, in contrast to lewer than 800 travel to Puerto Rico.
rooms in 1950. During the 1970's lurther increases
were achieved but at a slower pace and interrupted Tax Policies Related to Conventions
by setbacks, particularly in 1975 aud 1976. In these Present U.S. tax policy on deductions lar loreign
2 years a decline was registered in the number of conventions is beneficial to Puerto Rico tourism.
visitors and in their leve! 01 expenditures, il adjusted Section 602 01 the Tax Reform Act of 1976
lar inflation. In 1977 aud 1978, however, the indus- restricts the number 01 loreign conventions which,
try strongly rebounded and currently it is strong. are tax deductible to two per year. This policy has

27
had the impact of substituting domestic conventions cyclical swings in the U.S. economy strongly affect
for foreign conventions. Since Puerto Rico is treated the numbers who come, stay in hotels, and spend
as a domestic area for this purpose, the San Juan- money in Puerto Rico.
Puerto Rico Convention Bureau believes this policy N ot only do cyc1ical changes affect tourism, but
to have a beneficia! impact on Puerto Rico tourism. the industry is characterized by seasonal demando
However, legislation pending in the 96th Congress The major peak in Puerto Rico is during !he winter
proposes modification or abalition of the existing season when large numbers of visitors are attracted
tax treatment, with potential implications for !he from the colder U.S. mainland-particularly New
competitive position of Puerto Rico as a convention York and adjacent States-by Puerto Rico's atlrac-
venue. tive climate. A minor ·summer peak is developing
Another tax policy may affect the development among nonresident visitors and many local residents
of hotels in Puerto Rico by U.S.-based multinational use San Juan hotel facilities in the summer. Greater
companies. This is the provision, under section 936 stabilization of income and employment-both
of the Tax Code, which permits the transfer back cycJicany and seasonany-is desirable.
to the U.S. mainland of excess funds without fun
taxation. (See the Industrial Sector Study for detalls
of tax matters.) Area Concentration
The heavy eoncentration of Puerto Rico's tonrism ji
Policy Related to Use of Military Facilities industry in the San Juan metropolitan area has ':',
caused or heightened several problems. This con- ,
The U.S. Air Force has transferred the former eentration has resulted in tourist facilities, developed
Ramey Nr Force Base to Puerto Rico. The Air with only a minimum of urban planning, lying in
Force, however, retains rights to use sorne of the close proximity to sprawling urban development and
former base in time of emergency and negotiations sorne ponuted beaches. At the same time, other areas
have not been completed foC" the transfer of de- of the island considered to have tourist potential
pendent housing. There is disagreement as to remain largely undeveloped or underdeveloped. The
whether the delay in transferring to Puerto Rico full prior presence of only one air gateway-the San Juan
and permanent rights to Ramey has retarded devel- airport-and the prior level of air service contributed
opment of the nearby district (Punta Borinquen) as to this situation.
a tourism area. The Commonwealth has prepared Increased development of outisland tourist facili-
plans for the development of this area in western ties would seem to offer opportunities to attract addi-
Puerto Rico and is promoting it. tional tourist business, including that of local resi-
dents of Puerto Rico.

MAJOR PROBLEMS Air Transportation Problems


Despite noticeable recent improvements and its Competition with other tourist areas--especiany
present strength, the tourism industry in Puerto Rico within !he Caribbean region-is strongly affected by
faces a number of problems. Sorne of these problems air transportation service and fares.
emerged as the flow of incoming tourists slowed in Puerto Riean officials believe that inereased air
1975 and 1976 although they trace back to earlier serviee from more U.S. centers to San Juan and
years. Currently, attention is being given to these increased competition on existing air routes will in-
problems, but more needs to be done if tourism is crease tourist traffie.
to achieve its fun potential as an income contr.ibutor Sorne new air service has already begun, and
in the Island's economy of the 1980"s. The focus pending proceedings are cousidering additional routes
here is on four of the problems having important and competition.
impacts on the current situation; other problems are Present U.S. poliey also authorizes only San Juan's
covered in the fun sector reporto airport as an internationany scheduled airport. The
Puerto Rican Government believes that Borinquen
Nrport (former Ramey Air Force Base) in the west- :j,¡
Demand-Insufficient, Cyclical, and
ern part of the island should also be authorized as
Seasonal an international airport, looking to this change to !
A major problem is that of insufficient and irreg- help with plans to develop tourism in that area. ,(
ular demand which relates to the heavy dependence As indicated aboye in the section "Impact 01
on visitors from !he United Sta tes, particularly from Federa! Programs and Policies," increased air fares
the Middle Atlantic States. Abaut three-fourths of between the United States and Puerto Rico are of
the tourists are from mainland United States and continuing concern to Island officials. They view ,
¡,
1:

28 fi
¡;
,
"
sueh inereases as eonverting Puerto Rico from a Caribbean destinations, because of the impact of
low-fare destination to one relatively expensive to Puerto Rican and Federal Government labor legis-
reaeh from U.S. ipoints, lhus placing j¡ in a less lation setting minimum wage levels and other stand-
advantageous position in attraeting tourists. ards. It is importanl, therefore, for the industry to
make every possible effort to reduce unnecessary
Developing Outisland Tourlsm cosls through efficient management.

Federal Government poliey could aid outisland


tourism development-thus reducing tourism eoneen- PROGRAM AND POLlCY OPTIONS
tration in the San Juan metropolitan area-in two
ways. The first is to expedite the final siguing over Federal Government Options
of the former Ramey Air Force Base to Puerto Rico. A few major options, related lo sorne of Ihe majar
Development of Punta Borinquen, especially by pri-
problems indicated aboye, are summarized here.
vate developers, as a tourism destination is report-
edly being limited in part by the Air Force's reten- Broadening the Tourist Base.-Federal programs
tiou of the right to use the base in time of emer- eould assist the Commonwealth Govemment in en-
gency, and final negotiations have not been com- couraging the development of new sources of tourists
pleted on the transfer of former dependent housing. lo Puerto Rico. Such assislanee has already been
Private developers are reluctant to commit resourees given by Ihe Uniled Slates fravel Service (USTS)
to build tourism facilities under lhe present arrange- both through its field offices abroad (in Canada,
ments. This must, of eourse, be weighed in terms of Mexico, Japan, the Uniled Kingdom, Germany, and
U.S. need for future use of the base, and the terms Franee) and thraugh its special markels program
of a mutually satisfaetory negotiated transfer. which operates in a number of other eounlries, and
A seeond Federal aetion that could aid the devel- Ihrough familiarizalion tours, matching grants, and
opment of outisland tourism would be to provide assislance wilh commercial offices overseas.
assistance to Puerto Rico for planning and develop- The USTS will continue lo work wilh Puerto Rico,
ing new tourism areas. Development might take pending resource availabilily. The USTS has already
place, for example, in Punta Borinquen or a historie supported the 5-year lourism master plan for Puerto
eity sueh as Ponce. Funds for sueh purposes might Rico thraugh the Organization of American States.
be available from Commerce's Economic Develop- Federal technical assislance might be provided to
ment Administration. the Puerto Rican Government lo help in its efforts
Puerto Rico should also institute a marketing plan to reduce the seasonability of lhe present industrj'.
inc1uding an evaluation proeess as a focal point for Potential sources of such assistance are Federal
loug-term development. The basis for this is already granls in conjunclion with lhe master plan.
in existenee through a 5-year tourism master plan
projeet being conducted under the auspices of the Improving Air Transportation.-Federal Govern-
Organization of American States with support from ment policies with respeet to air transportation eould
the United States Travel Service. expand tourism to Puerto Rico. Increased points with
direet rautes lo San Juan fram Ihe U.S. mainland, as
Higher Prices and Wages welI as increased frequencies on present routes, are
under eonsideration. Such a poliey ehange appears
Puerto Rico has the problem of high priees for to be consislent with CAB's (Civil Aeronauties
tourism, particularly with respect to hotel priees. Board) inereased commitment to permissive rather
Major causes of the high hotel costs-as eompared than mandatory designation of routes as a means of
to sorne competing areas-are: (1) high eost of inereasing air transport competition. Such improve-
hotel eonstruetiou; (2) high wage and employment ments in lhe schduled airline service to Puerto
levels; and (3) union activity. This problem has been Rico---should CAB find lhem viable--are likely to
partially ameliorated during the 1970's when reduced have sorne limited favorable effect on tourism.
business prompted management to take steps to in- Also important are poUcies whieh further encour-
crease productivity. The ratio of employees to hotel age the development of innovative types of flights
rooms has generally been reduced-from more than providing reduced fares for trave!. Tourism officials
1 in the 1960's to less than 1 in most of the 1970's. in Puerto Rico have noted the recen! increased travel
Unions tended to agree to this reduction in employ- from the West Coast which they attribnte to new
ment and also reduced their wage and fringe benefit reduced package fares.
demands in the face of hotel c1osiugs. Aulhority conld be granted by CAB to make
Puerto Rico is likely to remain a relatively ex- Borinquen Airport an internationalIy schedu1ed air-
pensive lourism destination, compared to olher port. This presumably would lead to additional tour-

29
ism as well as assist in better regional development dations. These include: (1) architectural improve-
of !he industry. ments; (2) elimination of zoning nonconforrnities;
Sorne of these options are under consideration in (3) construction of pedestrian arcades; and (4) im-
current CAB investigations. (Further discussion of provement of traffic flows and parking facilities.
air transportation problems and options are covered Sorne of these proposed steps would primarily have
in the Transportation Sector Study.) shortrun effects whereas others, such as upgrading
the architecture of newly construCted buildings,
Puerto Rican Goverument Options would take mnch longer to have a snbstantial effect.
Broadening the Tounst Base.-The Govem-
ment of Puerto Rico could increase the present HOUSING AND CONSTRUCTION
resources of the Tourism Development Company
which promotes tourism with the objective of devel- Overview
oping new markets, especially outside the Middle
Atlantic States. Such an increase has been proposed Construction has been an extremely important
for the next fiscal year. Promotion could also be sector in the Puerto Rican economy, and its revival
aimed at decreasing tourism seasonality by promot- from present reduced levels is considered by the
ing tourism outside the peak winter season. Puerto Rican Government to be essential for the
Whether Puerto Rico should devote additional overall economic recovery of the island. Between
financial support to such efforts depends on their 1960 and 1972 the construction sector's contribution
effectiveness in increasing the number of visitors to GNP rose from about 13 percent to 23 percent,
and tourist expenditures. Even within the present and its employment rose from 45,000 to 81,000, or
constraints of funds sorne reorientation of the pro- about 12 percent of overall employment. The recent
motion program could assist, however, in broadening recession caused 1976 construction expenditures,
the present tourist base. in constant dollars, to drop by about one-third from l'
The master plan project can serve as a compre- the 1972 level, and construction employment by
about the same amount. A further decline was regis- I'[.!
hensive approach to tourism development and pri- Ir
tered in 1977, as the demand for industrial and
orities as well as an evaluation and coordination
commercial construction continued to diminish, and I
;1
mechanism.
As indicated previously, the Federal Govemment housing and public works expenditures failed to take
may be helpful in these efforts. up the slack.

Developing Outisland Tounsm.-In the long run, Housing.-Homebuilding, which accounted for
tourism growth in Puerto Rico is likely to require about 30 percent of the value of construction activity
a greater degree of outisland development. The during 1972-76, reached its peak in the years 1972-
Government is promoting s!Jch development by 74, then dec1ined, and has not begun a significant
constructing a number of small guest hote1s or recovery. The falloff in housing starts was caused by
paradores at selected locations throughout the island. greatly reduced unsubsidized housing activity, and
It is also encouraging tourism development in the aggravated by a near drying up of federally subsi-
Punta Borinquen area. Its options include continuing dized housing production. (The latter resulted from
the present level of effort or increasing such efforts. a 1973 moratorium on subsidized housing production
Ontisland development, which has the advantage of for the entire United States, since rescinded.)
being attractive to local tourists as well as U.S. and The Puerto Rican Government has assigned a
foreign tourists, will aid the geographical spread of key role to increased housing production to stimulate
tourism on the island. the economy, and it has outlined a 3-year effort for
the production of 20,000 new housing units per year,
The effectiveness of the Puerto Rican Govern-
divided almost equally between unsubsidized and
men!'s efforts will depend on successful planning
subsidized housing (44 and 42 percent, respectively),
and program implementation, with the assistance of
with a 14-percent allowance for individually built
Federal funds, to enlist the support of the private
houses (custom built or self built). Attainment of the
sector.
subsictized housing target depends upon the availabil-
Improving San Juau Tourist Facilities.-One op- ity of sufficient Federal subsidy aids and the ability
tion available to tbe Government in its overall pro- of the Puerto Rican Government and the local
gram to strengthen tourism, is to increase its efforts homebuilding industry to overcome institutional con-
aimed at improving the main San Juan tourist dis- straints that have, hitherto, inhibited large-scale
trict, i.e., the Condado and Isla Verde coastal strips. private ownership and operation of new rental hous-
Several studies have been completed indicating pos- ing. The major Federal subsidy program, the Section
sible improvements and making specific recommen- 8 Housing Assistance Payrnents Program of the

30
Department of Housing and Urban Development $45 000 for a single family house (now $60,000)
(HUD), provides subsidy for privately built and tended to prec1ude use of FHA financing i?- island
operated rental housing. (Public sponsorship is also subdivisions containing higher priced housrng, tar-
permitted, but will have a secondary role.) geted at second-time, upgrading buyers. Private
Business-related construction dropped preclpl- mortgage insurance companies have provided. pro-
tously between 1975-76, and this sector continued tection to conventional lenders who seek add!llOnal
at low ebb in 1977 and 1978. Public expenditures lending safeguards. AIso, continuing infiation ~as
for roads and other public works, however, showed diminished lender risk, as the size 01 the outstandrng
sorne upturn in 1978. These activities, which are mortgage loan tends to represent a constantly dimin-
federally aided, will have greater comparative im- ishing proportion 01 the property's increasing value.
portance in the construction sector in 1978 and 1979. The conditions suggest that FHA and VA will not
rapidly recapture their previous share of Puerto
Impact of Federal Programs and Policies.-Pro- Rico's mortgage financing. Puerto Rico's mortgage
grams of at least 10 Federal a~encies provide ~ignifi­ lending activities will, in all likelihood, continue to
cant amounts of direct financmg or other asslstance follow the mainland model, where FHA and VA
far the construction of housing, public warks, trans- mortgages currentIy claim only a small part of the
portation, and other infrastructure facilities in Puerto mortgage market and the likelihood for their sub-
Rico. stantial, near-term turnaround appears small.
In the field of housing, unsubsidized production Federally subsidized housing, which has repre-
in Puerto Rico had been historically supported by sented a substantial part 01 Puerto Rico's past hous-
the liberal financing terms and the protection to ing production, is expected to account for about 42
mortgage lenders provided under the Federal Hous- percent of new housing units in the next 3 years.
ing Administration (FHA) mortgage insurance pro- This par! of the housing market is aided by four
grams and the Veterans' Administration (VA) loan programs, three administered by the Department of
guaranty programo Houses under these programs Housing and Urban Development (HUD) and one
were required to meet prescribed minimum design by the Department of Agriculture's Farmers Home
and amenity standards, and together with their virtual Administration (FmHA). These are: (1) a "deep
assurance against lender loss, FHA and VA mort- subsidy" program to serve occupants of rental hou8-
gages found ready acceptance in the mainland's sec- ing (HUD's section 8 program); (2) a "shallow s~b­
ondary mortgage market. During the 1960's, about sidy" program to facilitate purchase of new housmg
75 percent of Puerto Rico's unsubsidized housing (HUD's section 235 home ownership program); 4
production was produced under FHA mortgage in- (3) a "deep subsidy" rental program (HUD's low
surance programs. During recent years, however, the income public housing program); and (4) FmHA's
role of FHA has become much smaller. In 1976 section 502 home ownership program, also consid-
FHA insured only 7 percent of total new private ered a "shallow" subsidy program, despite its greater
housing starts on the island. VA loan guaranty activ- potential assistance than HUD's section 235 pro-
ity, which had previously been much smaller than gramo
FHA's has recently matched and somewhat exceeded
FHA's. In nonhousing construction, programs 01 eight
U.S. agencies (in seven Departments) are identified
Conventional mortgage financing has largely sup-
as having recent impacts in Puerto ~ico. The~e
planted FHA and V A financing in Puerto Rico, and
inc1ude the Department 01 Commerce s EconomlC
this same secular shift has also been evidenced on Development Administration (EDA), which has pro-
the mainland. There are numerous reasons for this vided an important one-time "shot in the arm" with
shilt to non-Government-protected mortgage financ-
100-percent grants under the antirecession Public
ing. Conventional mortgage terms have approached Works Employment Acts of 1976 and 1977; $285
Or matched those of FHA, and these mortgages have million going to Puerto Rico, mainly for community
also lound acceptance in the mainland's secondary
infrastructure. ED A is also providing additional im-
markets. In Puerto Rico, local mortgages have re-
petus to construction under its regular public works
cently entered into participating agreements with
grant programo That part of HUD's "block .gra?-t"
mainland conventionallenders, wherein the mainland
funds which is spent on public works and slte lm-
institution will provide 90 percent of the mortgage
provements can be roughly equated with outlay for
loan, and the local mortgage lender will retain the
construction activities, about $30 million in FY 1977.
remaining 10 percent and also earn the mortgage
servicing fee. The processing time for conventional
4. This program is different írom the former section 23~ program in
mortgages is reportedly much quicker than FHA's, that the amount oí subsidy assistance has been substantl~llr reduced
and this faster approval is preferred by builders and and downpayment terms made more stringent; therefor~, 1t lS ?ot ex~
pected to be used in Puerto Rico as much as the pnor sectlOD 23S
buyers. Until recently FHA's mortgage ceiling of programo

31
The grant programs of the Environmental Protection ditional urban infrastructure. In part, this can be
Agency (EPA) for wastewater treatment construction attributed to lhe great difficulty of "fitting" Federal
and the grant and loan programs of the Farrners legislation to lhe unique, centralized administration
Home Administration (FmHA) for water and sewer of such programs in Puerto Rico. Much of the Fed-
construction are also large. (The aIlocation for Puerto eral public works legislation has been framed to
Rico under these various programs amounted to serve the highly decentralized administration of lhe
more than $100 million in FY 1976, the peak year.) mainland's 50 States, with their vast number of
Expenditures under two Department of Transporta- local government's and public authorities. Need for
tion (DOT) programs, the Public Roads Program greater administrative flexibility and adaptability,
of the Federal Highway Administration and the Air- both at the Federal and CommonweaIth level, are
port Development Aid program of the Federal Avia- prerequisiles for optimum Puerto Rican use of avail-
ton Agency, are also sizable. The programs of the able Federal public works assistance. The recently
U.S. Arrny Corps of Engineers and the Department demonstrated flexibility of the Economic Develop-
of HeaIth, Edncation, and WeIfare also contribute ment Administration, under the antirecession Local
to island construction activity. Public Works (LPW) program, is cited by the Com-
monweaIth as a prospective model for other Federal
Major Problems.-The marked decline in the agencies.
formerly strong construction sector raises a number
of problems. Several of the more important are con-
sidered here. PROGRAM AND POLICY OPTIONS
1. The basic problem is how to increase construc-
tion activity and development on a sound and orderIy Federal Government Options
basis. A strong increase in construction depends upon One of the possible options for lowering lhe cost
revival and continued growth of the business, indus- of new housing is the federaIly approved reduction
trial, and tourist sectors of lhe economy. Factories, of space and amenity standards, without adversely
office buildings, and resort facilities, however, wiII be impacting heallh and safety, for FHA insured or VA
built or renovated only in response to demonstrated guaranteed housing. (Puerto Rico has recently
demando Improved housing activity wiII automatically achieved certain of these economies under a program
flow from economic improvement and increased fam- financed with its own funds.) Opportunilies for
ily incomes. additional, substantial, construction economies, how-
2. The relatively high cost of housing, accom- ever, do not seem Iikely because of the continuing
panied by the inability of most Puerto Ricans to high costs of land, financing, and mechanical (cook-
afford even least expensive new housing, suggests ing, electrical, and toilet) facilities. Furthermore,
that the level of present housing quality standards substantial compromises with space and amenity
migbt be questioned. Only Iimited gains appear pos- standards migbt prejudice the acceptance of Govem-
sible, however, in this area through reductions of ment-protected mortgages for such properties in the
space and amenity standards. Furthermore, such secondary mortgage markets of the mainland.
gains cannot be achieved at the expense of health or In the field of public works construction, the
safety of (he occupants. single most important recent Federal program has
3. Certain local institutional constraints have to been the 100-pereent grants provided under the
be overcome in order to produce privately owned Public W orks Employment Acts of 1976 and 1977,
and operated subsidized rental housing under RUD's administered by EDA. The continuation of lhis
Section 8 Housing Assistance Payments Programo program is presently under consideration by the
These include: (a) lack of an adequate number of United States Congress.
Treasury-Iisted perforrnánce bonding companies for
new rental housing construction; (b) an insufficient
number of local owner-builders with interest and Puerto Rican Government Options
resources to undertake long-term financial investment In addition to sorne lowering of space and amenity
in rental property; and (c) current lack of private standards which the Puerto Rican Government has
experienced professional housing management firms already taken in its own programs, there may be
to serve a prospective increase in subsidized new certain site cost reductions which might help to re-
rental housing production. duce housing costs. In its public works activities,
4. There have been previous difficuIties in taking for example, Puerto Rico migbt bring water and
complete advantage of aIl available Federal pro- sewer Iines and streets to the boundaries of projects
grams to assist public works construction, des pite and subdivision siles, thus freeing developers from
the fact that Puerto Rico's extremely rapid urban certain offsile expenses. The Government migbt also
growth has created a great need for new and ad- consider reducing the price of housing siles it

32
acquires through HUD's block grant programs, imports of crude oil and exports of refined petroleum
selling surplus land which it owns at reduced prices, products.
and creating addilional moderately priced building Road transportation dominates the interna! trans-
sites through land filling or drainage. It should be portation pattern. Since the island has no railroad,
recognized that costs of finished siles represent only other than narrow-gage lines used to haul sugarcane,
a fraction (20 to 25 percent) of total sales housing virtually al! goods are moved between cities and
costs, and resultant economies from the aboye will towns by truck. Intercity public transportation is
be proportionately limited. primarily by means of "publicos"-privately owned
In the field of public works construction, a two- and operated cars and vans which accept passengers
pronged approach is required. The first would be along established routes and charge fixed rates by
[oc al government improvement in planning and capi- distance. These are augmented by private bus serv-
iI tal budgeting procedures for such public works in
order to obtain the maximum possible benefit from
ices that connect San Juan with Mayaguez and
Ponce, plus several small bus operations, using old

I¡ available Federal funds. In this regard, Puerto Rico


might develop a comprehensive inventory of needed
public works projects, giving priority to those that
equipment, that provide limiled intertown services.
Much travel is by privately owned cars. As of 1977
Puerto Rico had almost 770,000 vehicles, a 67"
meet the critería of the various Federal programs. percent increase from 1970. At present there is one

I
In so doing, it might also seek the technical assist- vehic1e for every four persons on lhe island.
ance of Federal agencies in qualifying projects for Within the San Juan metropolitan area buses,
particular Federal programs. The second is a con- publicos, trucks, taxis, and especial!y private pas-
centrated Federal effort to adapt its processing senger cars serve the local needs. Heavy traffic f1ows,
¡ procedures to the unique administrative environ- frequent traffic jams, and a relative1y high accident
ment of Puerto Rico, characterized by its highly rate are characteristics of travel in San Juan. A
centralized administration of public works programs
f and related development of local matching funds.
rapid rail transit system for San Juan is in the plan-
ning stage.
i Federal agencies have tended to be administratively
rigid at selected critical stages of public works pro-
gram administration. There have been recen! exam-
Impact of Federal Policies and Programs.-The
policies of US. regulatory agencies greatly affect
pIes, however, of administrative f1exibility that reflect Puerto Rico's transportation system and operations.
Federal agency capacity to cope with the distinctive Since ocean transportation betwen Puerto Rico and
needs of Puerto Rico. the U.S. mainland is part of U.S. coastwise trade,
the various laws and regulations conceming coast-
wise shipping apply to the island. This means that
the trade is confined to service by US-built, U.S.-
TRANSPORTATION operated, and U.S.-manned vessels under the U.S.
flag. The operating and construction differentia! sub-
Overview sidies applicable to U.S. companies engaged in for-
eign trade also are not applicable. Other testrictions
The transportation sector may be considered as having important impacts are those of lhe Civil
consisting of three facets: (1) the movement of Aeronautics Board (CAB) which has broad authorily
goods and people to and from the island by ships and to regulate, as well as promote, air transportation.
planes; (2) the internal islandwide transportation; Recent airline deregulation legislation, however, has
and (3) the urban transportation systems. somewhat eased these restrictions.
As an island heavily dependent on external In addition to the impact of the regulatory agen-
sources for both raw materials and consumer goods, cies, the Federal Government's various transporta-
Puerto Rico's transportation linkages to the outside tion programs that assist construction of facilities
are vital to all segments of the economy. Most and, in a few cases, provide assistance in operations,
of Puerto Rico's shipping and air traffic is with are of importance. Funds for building highways (ap-
the US. mainland. Shipping between Puerto Rico portioned to Puerto Rico according to the same
and the mainland-considered as part of the US. formula as used for the States), funds for urban
coastwise trade-is unbalanced; cargo tonnage is transportation systems (apportioned as for mainland
much heavier ingoing than outgoing. Freight costs urban areas), and funds for airport construction and
are reJatively high and have increased rapidly in improvement are of greatest significan ce. Other U .S.
recent years. San Juan is by far the most important programs providing assistance inc1ude those for har-
port in the handling of dry cargo, with Ponce and bor maintenance and improvement (Army Corps of
Mayaguez of lesser significan ce. Ports on the soulh- Engineers) and for navigation aids (the Coast
ern coast, owned by manufacturing firms, han dIe Guard).

33
The numerous Federal transportation funding pro- competitive and Puerto Rican consumers are not to
grams applicable to Puerto Rico, together with data face greater price disparities.
concerning their use as of 1977 are covered in the
ful! sector repor!. Passenger Ship Services.-Presently there is no
U.S.-flag passenger service between Puerto Rico and
the U.S. mainland on either a liner or a cruise basis.
Major Problems The Commonwea1th, which believes that the U.S.
The Transportation Sector Study started by exam- cabotage provisions hurt its tourist trade, has sug-
ining problems and related issues which had been gested that these restrictions be removed from pas-
identified by !he Puerto Rican Government. In par- senger service so that foreign ships could operate
ticular, the rising costs of maritime transporta- between Puerto Rico and the U.S. mainland.
tion, the need for ship passenger service to assist The sector study analyzes this proposal and con-
tourism deve10pment, and the problem of improved dudes that such a change would not have a substan-
air transportation were investigated. Other problems, tial beneficial effect on Puerto Rican tourism. In
however, were identified and studied along modal point-to-point service (Iiner service) it is considered
and government program Iines. unlikely that enough traffic could be generated to
Among the problems discussed in the sector study interest foreign ship carriers which would have to
are: (1) !he high cost of ocean freight; (2) the need compete with quick, convenient air service. Sorne
for passenger ship service between Puerto Rico and increased benefits might result if foreign cruise ships,
the U.S. mainland; (3) expanded air service; (4) de- which under present policy may remain in a Puerto
ficiencies in the road and urban transportation sys- Rican port only 24 hours (for ships carrying pas-
tems; and (5) delays in using available Federal funds sengers embarked at another U.S. port), were to be
for the construction of transportation facilities. allowed longer port stays. However, the increased
Among additional transportation-related problems, revenues to Puerto Rico from such a change are
not covered in this summary, induded in the sector likely to be limited since such ships normally serve
study are trade disruptions due to labor disputes, as hotels and restaurants.
problems concerning ship construction and repair, as
Expanded Air Service.-Puerto Rico considers its
wel! as more specific aspects of the five problems
present air service inadequate from the standpoint
listed aboye.
of further development of tourism and in the han-
High Oeean Freighf Rafes. '-Ocean freight rates dling of cargo. It advocates: (1) new routes between
-so important to the Island's economy-are high Puerto Rico and U.S. mainland cities and additional
and have risen in recent years. They are one element carriers for the established routes; (2) expanded air
that affects !he competitive .position of Puerto Rican cargo service between Puerto Rico and the U.S.
manufacturing plants-as well as !he costs of im- mainland and intra-Caribbean points; and (3) ex-
ported consumer goods. The sector stndy provides panded air service to Europe and Latin America.
data to analyze the factors involved. Low ultization These "problems" are complex ones, currently be-
fore the Civil Aeronautics Board (CAB) in two in-
rates of the ships engaged in the Puerto Rican-U.S.
mainland trade, rising fuel costs, and use of outdated
equipment were identified as basic causes. The
vestigations. However, the Caribbean Area Service
Investigation (Docket 30697) involves much more
I
analysis found that exemption from the cabotage than Puerto Rico-U.s. mainland service and may not
laws-sometimes pointed to as an answer to the be expected to be completed for several years. The
problem-would not provide a lasting remedy. The likely result of CAB investigations would be to elim-
entry of foreign ships might initially lower freight inate entry restrictions to the Puerto Rican markets.
rates, but in time with the Iikely establishment or With respect to air cargo, the CAB recently
realinement of liner conferences the carriers engaged granted authority for an airline to provide service
in the Puerto Rican trade would be subject to between Puerto Rico (Borinquen Airport) and South
"agreed upon rates" rather than rates reflecting the America for a period of 7 years, with certain con-
true costs of this Iimited trade segmen!. ditions.
The sector study condudes that Iittle can be done Road and Urban Transportation.-The analysis
that would material!y lower rates and that relatively of road transportation and urban transportation sys-
high freight rates can be expected to remain a basic tems notes several problems. One is the general
feature of Puerto Rican commercial shipping. This deterioration of highways; maintenance has not kept
points up the critical need for offsetting economies pace with the growth of vehicular traffic. Heavy
elsewhere-if Puerto Rican industries are to remain traffic congestion and inadequate bus service in the
5 The special problem of ocean costs related to petroleum are con~
San Juan metropolitan area are among other prob-
sidered in the Energy Sector Study. lems discussed.

34
Federal Fund Programing.-An important prob- Air Transportation.-In the field of air passenger
lem identified in the eourse of the sector study, cut- transportation, the Civil Aeronautics Board (CAB),
ting across the various transportation modes, con- which is at present investigating the adequacy of
cerus the planning of projects and the program and air service to Puerto Rico, could decide--on the
project implementation in which Federal funds are basis of a Puerto Rican appeal-to expedite the
involved. The Puerto Riean Govemment appears to normalIy lengthy decisionmaking process. With re-
have been unusually slow in developing projects in spec! to air cargo service between Puerto Rico and
the construction of airports, highways, and urban Latin America-one of the improvements desired
transportation systems. In the case of the Federal-aid by Puerto Rico-the CAB recently approved ex-
highway programs, for example, some $72 million of panded service for a 7 -year trial periodo Any further
unutiJized funds were available as of 1977 and an improvements here will need to await resuIts of fuis
additional $3 million under the Economic Growth change. Moreover, cIose monitoring of fue new
Center Development Programo SimilarIy, in the Fed- service by the Puerto Rican Government could pro-
eral urban transportation assistance program grants vide the basis for any needed further expansiono
amounting to sorne $51 million were available for
obligation as of October 1977. Highway Transportation.-Several options exist in
It is recognized that in the case of sorne programs
connection with fue use of Federal-aid highway
the availability of adequate local funds for the funds and other program funds related to safety, con-
i struction, and emergency relief. These funds have
! "matching" of Federal grants is a major aspect of
the problem. In other instances, however, this does been of major importance in Puerto Rico's highway
not appear to be true since delays in project devel- construction only in the past several years. The
opment have also occurred in programs with 90 per- initial slowness in project development is under-
cent, or even 100 pereent, Federal funding. standable and sorne improvements are noted. How-
ever, additional efforts to step up project develop-
ment are a real option. Greater use of the unobli-
Policy and Program Options gated funds will not only contribute to improved
Many of the basic transportation problems iden- transportation infrastructure but wiII also stimulate
tified are eomplex with multiple causes and are not construetion employment at several levels sinee
ones that can be quickly sol ved or even materia11y almost a11 c0'ntraet0'rs, subcontraetors, and material
a1leviated. However, certain steps toward improve- suppliers operating in Puerto Rico are local firms.
ment of the overa11 situation are possible. These are Improved project development involves a mix of
considered here. local and Federal actions. Puerto Rico can do much
to overcome delays, but better coordination on the
Port and Navigation Systems.-One way in which part of Federal agencies at an eady stage of project
shipping costs can be reduced-though only to a development is also a necessary ingredient. In the
limited degree-would be through improvement of case of environmental impact statements and other
Puerto Rican port and navigation systems. The sec- special requirements, for example, Federal agencies
tor study indicates the need for a basic plan; the can help by reducing review and approval time.
Puerto Rican Govemment might we11 decide to pre-
pare a master plan, incIuding both an overall port Urban Transportation.-In many respects local
capacity assessment and plans for future port devel- officials have been farsighted in the field of urban
opmen!. The study identifies Federal programs that transportation. The highway and transit services of
can provide planning grants to assist in such an the S3.n Juan urban area have been assessed on a
effor!. After an overa11 plan has been prepared, continuing basis. Also, a system has been imple-
those port development projects of highest priority- mented t0' increase the efficiency of the existing facili-
if Puerto Rico decides they are of sufficient impor- ties and the use of exclusive bus lanes was an early
tance relative to other demands on its resources- demonstration of fuis concept which has since been
may be financed partly by the Economic Develop- adopted by many U.S. mainland cities. The current
ment Administration (EDA) or other agencies. planning eflort for a rail rapid transit system in San
These past development projects, however, must Juan appears to be moving ahead.
compete with a myriad of ofuer projects as there are Several other possible actions, however, have been
no funds available strictly for port developmen!. identified in various studies that have not been im-
Assistance for the improvement of local naviga- plemented. For example, the faHure to enforce pres-
!ion systems also may be available. Currently the ent parking regulations or to impase additional park-
Coast Guard is reviewing the needs for additional ing restrictions contribute to street congestiono Fur-
electronic aids in the Greater Antilles which incIudes ther efforts to improve the equipment maintenance
Puerto Rico. and service reliability of fue Metropolitan Bus Au-

35
thority, which operates bus service within San Juan, jumped nearly fivefold between 1971 and J 977.
would appear to be an important option; a reversal Prices for industrial petroleum products registered a
of the decline in bus ridership, which has occurred fourfold increase in this same periodo
since the late 1960's, would also reduce congestion, Electric rates more lhan doubled for individual
as well as reduce petroleum consumption. In the consumer and tripled for industrial users, compared
case of Ponce, Mayaguez, and Caguas-the other to an approximate 50-percent overall increase in the
three urbanized areas-more expeditious use of U.S. mainland. Since Puerto Rico has a modern elec-
available "Section 5 Formula Assistance," annually tric power system that serves more than 95 percent
allocated by the Federal Highway Administration of the population, everyone was affected by these
(FHWA) specifica11y for these areas and providing increases. To a11eviate the hardship on low-income
operating assistance as we11 as assistance for capital families, the Commonwealth Govermnent provides
improvements, seem worthy of greater attention than subsidies for households using less than 425 kilowatt
in the past. hours per month.
Allhough Puerto Rican per capita energy con-
sumption is lower than in the U.S. mainland, it may
ENERGY be considered high and much of it is in the form of
Overview gasoline. Consumption of gasoline increased nearly
50 percent from 1971 to 1977, even though prices
Puerto Rico's energy needs are nearly a11 met by nearly doubled. Today, there is one auto for every
imported crude oil and its byproducts. These im- four Puerto Ricans and the average fuel consump-
ports provide electric power, energy materials for tion per motor vehicle is slight1y higher than in the
industry, gasoline for transportation, and fuel oil for U.S. mainland.
basic amenities.
Only about 60 percent of the petroleum imports Impact of Federal Programs and Policies
are used to meet internal needs. The rest is exported,
primarily to the mainland in the form of petro- The U.S. Government has been directly involved
leum products and petrochemical products. The in matters relating to Puerto Rican energy and the
petrochemical industry was developed in the second petrochemical industry since 1959. In that yenr
half of the 1960's when the U.S. Govermnent crude oil import quotas were established for the
adopted special concessions so that Puerto Rico island under the Mandatory Oil Import Program
could supply the United States with such prodllcts. (MOIP). In 1965, Presidential Proc1amation 3693
At that time it seemed certain that low-cost crude provided measures for the allocation of imports of
oil would continue to be readily available. That feedstock raw materials in order to develop a petro-
situation no longer exists. The OPEC pricing policies chemical industry. In subsequent years amendments
since 1973 have had a tremendous impact. Today, . to the MOIP, additional Presidential proclamations,
with great1y increased costs for feed stock, fuel, and and the rules and regulations of successive energy
power, the Puerto Rican petrochemical industry is agencies (now incorporated into the Department of
no longer cost competitive with U.S. Gulf Coast Energy) have continued to control Puerto Rican
producers. Also, the leading refining company-the imports of petroleum.
Commonweallh Oil Refinery Company (CORCO)- Regnlations Affecting Supply and Demand.-
dlle to a combination of unfavorable supply con- Since 1973 U.S. petrolenm imports,. formerly on a
tracts and higher energy prices-is undergoing re e quota basis, have been on afee system, with sorne
organization under chapter XI of lhe Federal Bank- imports being fee-exempt and sorne on a fee-paid
ruptcy Act. basis. Under the program, specific long-term a11oca-
In addition to the petroleum refining and petro- tions of fee-exempt imports were provided Puerto
chemical groups, a major energy user is the Puerto Rican refiners, with additional imports being subject
Rico Water Resources AUlhority-the electric utility to an established fee. A supplemental U .S. import
company that is the sole supplier of electric energy fee, added in early 1975, was dropped for Puerto
for industrial, commercial, and residential use. Elec- Rico in mid-year with the imposition of an excise
tric power production has increased more than ten- tax of the same amount co11ected by the Common-
fold since lhe late 1950's-from 1 billion kilowatt wealth. In December 1975 when the United States
hours to over 11 billion in 1977. abolished its supplemental fee, Pnerto Rico con-
The impact of greatly increased crude oil prices tinued to levy its substitute tax of $2 per barre! on
in recent years has been, of course, worldwide in imported crude oil and naphtha, wilh various ex-
scope, but it was particularly pervasive in Puerto ceptions, until July J, 1978. On June 21, 1978, the
Rico. Department of lhe Treasury of Puerto Rico issued
The average cost of crude oil in Puerto Rico a resolution, effective July 1, 1978, suspending lhe

36
supplemental oil import fee. This fee, however, could Puerto Rico can use to supply its needs?
be reinstated at any time by adoption of a resolution 2. What additional measures can the Govern-
by Puerto Rico's Department of the Treasury. ment take to assure more effieient use of its present
energy supplies?
Price Regulations.-Puerto Rico is subjeet to U.S. 3. What measures can Puerto Rico take to reduce
petroleum price regulations eovering erude oil, gasoline consumption?
motor gasoline, and eertain other products. These 4. What are the future implieations for the Puerto
regulations, aimed at limiting inereases aboye base Rican petroehemical industry whieh is virtually 100
period priees, should have the elfect of restraining pereent dependent on imported naphtha feedstock,
selling prices in Puerto Rico, but the $2-per-barrel high fuel eosts, and high power costs?
excise tax, ouly reeently rescinded, has aeted to off-
set lhe positive effeet whieh these regulations may
have hado
Program and Policy Options
There are no easy solutions to Puerto Rico's basie
EntitIements Programs.-The Crude Oil Entitle- energy problem. The nearly total relianee on im-
ment Program, instituted in late 1974 as an elfort to ported petroleum, eompounded by its highly en-
equalize the cost of erude oil among U .S. refiners closed and isolated system, and the existence of a
(later expanded to eover certain other petroleum large petroehemical infrastructure mean that rapid
produets), has had a majar favorable impaet on changes are not possible. Puerto Rico must live with
Puerto Rico. Maximum entitlement benefits are re- high energy costs. It can, however, develop a strat-
eeived by Puerto Riean importers of f"rcign erude egy which directs stronger efforts than at present
oil; naphtha importers also receive entitlements. toward: (1) developing new energy sourees for the
CORCO, for example, had reeeived a total of more long run; (2) greater eonservation. It may need also
than $477 million from its sales of entitlements for to consider more basic ehanges lhat reduce the use
erude oil and naphtha through Deeember 1978. of energy.
Despite the large payments, Puerto Riean officials
believe that the entitlements did not fully equalize Alternative Euergy Sources.-It is sometimes said
eosts sinee Puerto Riean eompanies are eompletely that Puerto Rico has no alternative energy sources.
dependent on higher priced imparted naphtha feed- It is true that it has no eoal, no natural gas, nor
stoeks eompared to mainland operators who have pro ved resourees of petroleum and that it has long
aeeess to lower priced domes tic naphtha. In No- sinee developed its small hydroeleetric potentia!.
vember 1977, it was found that Puerto Rican eom- Looking further ahead than the immediatc future,
panies were in faet at a disadvantage and a new however, Puerto Rico does have alternatives- ·solar
formula was introdueed for ealeulating the imputed energy, possible offshore oil supplies, wind, coal
eost oí domestic naphtha resulting in inereased en- imports, and nuclear energy.
titlements for Puerto Riean firms. An Oetober 1978 The Puerto Rican Government can decide on a
DOE decision extended previously granted exeep- strategy that takes full advantage of technd'logical
tion relief permitting CORCO to ntilize its own developments in alternative renewable resources. It
naphtha aequisition eosts in ea1culating the value of can draw upon U.S. pilot sludies and devise some of
naphtha entitlements. This relief is effective until its own applicable to lhe special conditions, in
September 30,1979. Puerto Rico.
Simple solar energy technologies appear to offer
Major Problems the most immediate-through limited-alternatives.
Solar water heaters, for example, might be used in
The Basic Issue.-The basic issue, simply stated, houses and solar collectors for process heating in
is: How can Pnerto Rico best adjust-in both the some factories within a short time. Wind-generated
short run and the long run-to its virtual1y com- energy also appears promising in many areas of the
plete dependence on imported petroleum in meeting island where wind patterns are of great intensity and
its energy needs? consistency; lhe new federally sponsored wind tur-
The answer to this involves developing energy bine generator on the island of Culebra may indicate
policies and programs for lhe Island which are both the viability of lhis energy source. Special efforts can
realistic and also consonant with U.S. palicies and be undertaken to expeditiously determine whelher
programs, some of which ate currently still being the offshore oil deposits are commerdally 8ignifi-
developed. can!. Despite serious environmental and safety
problems in developing nuclear energy and the in-
Other Issues.-Among the many related sub- definite postponement of Puerto Rico's proposed
sidiary issues are the followiug: nuclear plant, lhis source should not be ruled out.
1. Are there alternative energy sources that Over the long run, nuclear energy may be a work-

37
able alternative in supplying much oi Puerto Rico's to $5.5 billion. 6 Approximately haH of the banking
energy requirements. business is in the hands of branches of external
banks (two U.S. and two Canadian) or local banks
Conservation Measures.-The Puerto Rican owned by nonresidents.
Energy Office has outlined several conservation External participation has increased significant1y
measures-improved generating efficiency of e!ec- in recent years. This is due in part to the fact that
tricity, lighting efficiency standards, thermal effi- the two large New York banks (Chase Manhaltan
ciency standards, more efficient government use of and Citibank) have supplemented their local deposits
power, new government procurement practices, with funds from the home office or other non-Puerto
transportation conservation measures, and a solar Rican branches, and in part to the takeover of sev-
water-heating programo If these measures are pushed eral local banks by external owners as a result of
vigorously, substantial savings can be accomplished. "reseue" operations.
The Commonwealth may opt, however, for addi- The "structure" of banking in Puerto Rico is
tional measures. For example, it might offer tax in- similar to that in the rest of the United States, in
centives to industrial users who conserve energy. the sense that Puerto Rican banks provide essentially
Every possible means to achieve greater efficiency in the same range of services to their depositors and
the use of energy materials would seem to be de- borrowers as are provided elsewhere. However, be-
sirable in Puerto Rico's strategy for the future. cause of Puerto Rico's unique position, first as a
A number of other measures-most of them in- possession and later as an associated commonwealth,
volving changes in present lifestyle-may be con- the branches of external banks play an important role
sidered. Reduction in the heavy use of automobiles, (cross-State branching is, in general, prohibited in
accompanied by an upgrading of the transportation the 50 States). The overall loan/deposit ratio is un-
system (especially in the San Juan area), may bring nsually high since the branches of the two New
Javings. York banks have brought funds ;nto the island, but
the balance sheet ratios are not nnlike those else-
Petroleum Refining and Petrochemicals.-The
where for the indigenons banks. Recent1y foreign
present cost imbalance between the refining and
ownership of individual "local" banks, Le., with
petrochemical industries operating in Puerto Rico
headquarters in Puerto Rico, has become an impor-
and on ¡he mainland should, to a large extent, be
tant feature.
eliminated over the next few years, as domestic
energy prices are aIlowed to rise to world levels.
With the equalization of feedstock, fue!, and power Impact of Federal Programs and Policies
costs, the only remaining' cost disadvantage of loca- The major Federal program directly affecting the
tion in Puerto Rico would be transportation costs. general health of the Puerto Rican banking system
The program of decontrol for crude oil is under- is that of the Federal Deposit Insurance Corpora-
way as the President has directed the DOE to phase tions (FDIC) in operations relating to bank failures.
out all controls on domestically produced crude oil lt is probably not an overstatement to say that with-
by September 30, 1981. out the FDIC, there would have been several bank
Over a period of years, Puerto Rico will need to failures in Puerto Rico in the last several years, with
make changes in its energy mix. The final mix will large losses to depositors, and with possible serious
depend on a number of factors, inc1uding the overall repercussion on even the sounder banks. As it is, all
economic strategy chosen by the Commonwealth for deposits-insured or uninsured-have been assumed
its further development and the future U .S. energy by successor banks (in some cases with FDIC as-
policies and programs-as well as decisions taken sistance, and in some cases without), and there have
by Puerto Rico itseU concerning development of new not even been any "mns" on threatened banks.
energy sources, more efficient use of its energy, and The FDIC, faced with the insolvency of a bank,
possible reduction in energy usage. generally has two possible courses of action. The
tirst is to permit the c10sing of the banks, pay off
the insured depositors, and liquidate the bank. The
COMMERCIAL BANKING uninsured depositors and other creditors (and pos-
sibly the shareholders) would then be reimbursed as
Overview the bank's assets are realized. The other procedure-
more commonly employed-is to purchase some of
The commercial banking needs of Puerto Rico
are generally weIl served by a network of 17 institu- 6 Since the report on banking was completed, a majar local bank-
Banco Credito y Ahorno Poneeno--was closed. Its deposits and __ part
tions operatiug 242 banking offices. As of mid-1977, of its assets were transferred to two other banks, Banco Popular and
their combined total assets were $7.5 billion; loans Banco de Santander-Puerto Rico. The assuming banks have reopened
Banco Credito's offiees, including the New York offiee whieh waS
and discounts amounted to $4.7 billion, and deposits taken over by the Banco de Santander.

38
the assets of the failing bank and/or extend direct the Bank of America, and the acquisition oí con-
assistance to another insured bank (which may be a trol of several other local banks by Spanish interests
newly fonned bank) to enable the latter to assume have combined to bring this problem to the fore.
the deposit liabilities oí the failing bank. This second While this may not be a major problem in a broad
procedure, which was employed twice in Puerto Rico economic sense-indeed, a strong case can be made
in recent years, has the advantage that all depositors that external banking has, on balance, been benefi-
of the bank are protected, and there is generally no cia! to the Puerto Rican economy-political implica-
interruption to banking services. However, the FDIC tions are involved. Although loca! unit banking is a
can nse the second procedure only if it determines predominant feature of U.S. banking and cross-State
that it would be less costly to the Corporation than banking (either via branches or suhsidiaries) has
the first. Under very unusua! circumstances, de- been widely inhibited, recent developments have
scribed in the banking sector study, the FDIC may been in the opposite direction. In Puerto Rico, how-
extend aid directly to a bank in trouble in order to ever, the sentiment in favor of local banking is still
permit its continued operation. strong, especially within the banking community
There appears to be no serious criticism of the itself. The desire for a better balance between local
FDIC procedure on the part of Puerto Rico nor any and external banking is understandable.
serious suggestions for change. Local vs. External Banks.-In several respects,
A second Federal "program" is that of bank su- the local banks have not fared as well as the external
pervision, divided between the FDIC (for local in- banks operating in Puerto Rico. Their "shares" of
sured banks) and the Comptroller of the Currency deposits have been lower, they have been more
(for national banks, especially the local branches of strongly affected by a recent tax change, and they
Chase Manhattan and Citibank). Commonwealth are at a disadvantage in attracting equity capital.
authorities participate with the FDIC in the exam- The local banks have a considerably smaIler per-
ination of local insured banks, but not with the centage of the deposits of sections 936 companies
Comptroller in the examination of national banks, than the external banks-particularly the two large
a1though such participation appears to be authorized N ew York banks-primarily due to institutional
under Puerto Rican law. In view of the unique reasons. The inability of local banks to fulIy capi-
autonomous nature of the Commonwealth Govern- talize on this important source of relatively low-cost
ment, it would appear that the Puerto Rican au- deposits, is an adverse factor in their effort to im-
thorities would be justified in exercising the same prove their profit position.
degree of supervision over branches of external Another local! external issue results from the im-
banks that they do over indigenous institutions. position of the franchise tax on earnings. Although
the fuIl effect is yet to be felt, it a ppears that this
Major Problems tax has a greater impact on the tax burden of local
Uncollectable Loans.-A major problem facing banks than on external ones since the N ew York
the Puerto Rican banking system in recent years banks cau credit the tax against their Federal in-
has been the large volume of uncollectable loans, come taxes, thereby reducing the impact. Thus, in
especially real estate related loans made during the comparison with the prefranchise tax period, the
boom years of the late 1960's and early 1970's. local banks have another unfavorable factor affect-
While sorne banks in the U.S. mainland found them- ing their profits relative to external branch banks.
selves in similar circumstances, Puerto Rico was The need for additional capital by most of the
unusually hard hit, and the recovery-especially in local banks remains substantial. The recent heavy
the real estate construction sector-has been much losses of these banks, however, have depressed
slower in Puerto Rico. With the resolution of the Puerto Rican bank stocks and made it virtualIy im-
affairs of Bauco Credito in early 1978, the major possible for them to raise additional local equity
immediate difficulties appear to have becn SUf- capital, except by way of reinvested earnings in the
mounted. Further recovery and growth of the local case of those continuing to show net profits. An out-
banking system presumably will be c10sely related side bank, on the other hand, does not necessarily
to and dependent on Puerto Rico's general economic measure the contribution of its Puerto Rican opera-
recovery and expansiono tion to its overall position solely by the profit and
loss statement of the Puerto Rican branch or sub-
Tbe Role of External Banks.-In the view oí sidiary.
m~ny observers the major problem of the Puerto The problem, !hen, is how to make banking suffi-
Rlcan banking system is the growing role of ex- ciently profitable for the local banks. Only by this
ternal, Or externally owned, banks. The expansion of means can they attract additional local capital and
the Banco de Santander as a result of the settlement maintain, or even increase, their relative share of
of the Banco Credito affair, the recent admission of banking activity.

39
Program and Policy Options tween 1950 and 1973. Notwithstanding the substan-
tial increase in employment opportunities and the
Unlike the other sector studies, the study covering relief of population pressure through migration to
commercial banking makes no attempt to propose the mainland, unemployment remained at lOto 12
Federal and Puerto Rican options related to the percent of the work force.
problems outlined aboye. During the recent recession starting in 1973--
This does not mean that changes in the present more marked in Puerto Rico than on the mainland
banking arrangements may not be desirable. Rather, -employment dropped sharply and unemployment
two factors prescribe this omission. First, ¡here are reached about 20 percent in 1976 and 1977. More
no Federal programs in the Puerto Rican banking recentIy, i.e., in late 1977 and in 1978, some cycIical
sector in the same sense that they exist for most of economic recovery has occnrred but the overalI un-
the other sectors where direct Federal funds and employment rate remains very high at about 17 per-
technical assistance are provided. As indicated, how- cent (compared to about 6 percen1 on the mainland).
ever, Federal banking agencies do exercise some The recent unemployment situation has been exacer-
authority over the Puerto Rican system. Second, in bated by the inflow into the Puerto Rican labor
order to. develop sound policy options a far more force of large numbers of migrants returning from
detailed study than was possible for the present re- the U.S. mainland, a development ¡hat reversed the
port would be needed. For example, to propose spe- earlier long-term migration pallern.
cific measures that Government policymakers could About 19 percent of total employment is in manu-
undertake to strengthen the role of local banks facturing, 19' percent in trade, 17 percent in services,
would require a thorough study of the present op- 6 percent in construction, and 6 percent in agricul-
erating revenues and costs, as welI as other aspects ture. The largest employment "sector" is public
of banking practices (based in part on confidential administration with 23 percent; however, this per-
reports filed with the FDIC and the Commonwealth centage inc1udes employment in certain productive
Treasury). Only in that way could an adequate ap- enterprises normally carried out by private business.
praisal of the weaknesses of local banks be made. The sharpest drops in employment in the 1973-75
An additional consideration entered into the deci- period occurred in construction and manufacturing.
sion to omit options. Desirable as is the objective to Construction employment plunged by about one-
assist local banks in achieving strength relative to fourth and factory employment dec1ined by one-
external banks, this objective may be somewhat in tenth. Agricultural employment continued its long-
conflict with the basic need to ensure that the Puerto terrn decline, although at a slower pace than in
Rican banking system is adequately furthering the earlier years. The only sector to show sustained in-
economic development of Puerto Rico. The mos! creases during this recent recessionary period was
readily apparent options that could be suggested on public administration, where the Job gains in part
the basis of this limited study therefore may not give represented federally financed manpower programs.
sufficient weight to the overriding objective of im- Despite an enconraging upturn in 1977, as of J an-
proving the Puerto Rican economy. uary 1978 unemployment rates remained high in "
important sectors: 21 percent in manufacturing, 49
percent in construction, and 47 percent in agricul- 'j
i
EMPLOYMENT, WAGE STRUCTURE, tnre. ~
AND MlGRATION Other sigificant features of Puerto Rico's employ- l."
ment situation are: (1) long-terrn and continuing !
Overview decline in labor force participation, (2) very high
rates of unemployment for youth, (3) a relatively
Although not a sector in the same sense as manu- high level of unemployment for heads of households,
factnring, agriculture, or tourism, a separate report (4) shorter duration of unemployment periods, and
on employment, unemployment, wage structure, and (5) higher unemployment outside the San Juan
migration was incIuded in the Study since these metropolitan area than within il.
labor aspects are of vital conCern. In 1976, the participation rate in the Puerto Rican
Employment and UnempIoyment.-Puerto Rico labor force, Le., those 16 years of age or over who I
has had secular, long-term high unemployment and were either employed or looking for work, was only ii
underemployment. In the 1950's and 1960's the 42 percent, compared to nearly 63 percent in the
rapid economic development had a very favorable United States as a whole. Not only is labor force
effect on unemployment, but even during the height participation low, bnt almost one-tenth of the em-
of "Bootstrap" operations unemployment greatly ex- ployed are considered to be underemployed.
ceeded leveIs on the U.S. mainland. New Job Crea- The highest rates of nnemployment are for youth',
tion averaged approximately 150,000 annualIy be- particularly those 16 to 19 years of age. During

40
I
1977, the unemployment rate for this group f1uc- parisons with such benefits in the U.S. mainland
tuated around the 50 percent mark. since Puerto Rican data do not cover all fringe
Unemployment among heads of households has benefits but only tbose mandatory under Puerto
increased in the 1970's. Whereas 7 percent of this Rican law. Additional inforrnation on this aspect is
group were unemployed in 1970, by 1976 the rate needed, but it appears that the total of voluntary
was 16 percent. This latter rate compares with oue and mandatory fringe benefits in Pnerto Rico may be
oí less tbau 5 percent for the Uuited States as a somewhat smaller than on tbe U.S. mainland.
whole.
Unemployment iu Puerto Rico is characterized by Impact of Federal Programs and Policies
a much shorter duration than ou tbe mainland. This
may reflect high instability in employment as well Programs Relaled lo Employment.-Various Fed-
as the possible impact of continuing migration of eral Government programs primarily aimed at in-
unemployed persons to and from the mainland. creasing employment operate in Puerto Rico. For
Unemployment is considerably lower in the San the most part, these programs are run by the Com-
Juan metropolitan area than in fue rest of the island. monwealth Government or local governments, with
The principal reason for this difference is probably the U.S. Department of Labor providing funds and
due to the composition of the metropolitan area's overal! regulation. These programs, although making
economy; many persons in the San Juan area work an important contribution, cannot by themsel ves
for the Government or for commercial and service take up all the slack created by very high levels of
enterprises related tbereto, which means greater im- unemployment and the lack of job opportunities in
munity to cyclical swings. tbe private sector.
These Department of Labor programs may be
Wage Structure and Rates.-The Puerto Rican c1assified into five types:
economy has been shifting from one of low wage,
low skill, labor intensive industries toward one more • Public and private ¡ob development and place-
similar to that of lhe United States. Important dif- ments under the Comprehensive Employment
ferences exist, however, tbat affect the wage s(ruc- and Training Act (CETA) which ope'rates
ture. Puerto Rico has a far larger percentage of through local!y run programs.
workers in tbe public sector, including workers en- • Training and work experience, particularly for
gaged iu such enterprises as the sugar industry, ship- youths and other economically disadvantaged
ping, and bus transportation which in the United groups.
States is handled by the private sector. Despite a
decline in agricultural employment, Puerto Rico has • Job counseling, testing, ¡ob deve/opment and
a higher proportion of workers in this relatively placements throngh the public Employment
low-paying sector. On the other hand, construction, Service.
a high wage industry, is relatively more important • lncome maintenance through the Unemploy-
in Puerto Rico. AIso, in the manufacturing sector ment Insurance System. ~
such low wage industries as tobacco, textile, leather
goods, and apparel account for a much larger per- • Specialized training through apprenticeship pro-
centage of employment than in the U.S. mainland. grams.
Important characteristics of the present wage
The funding provided these programs in Puefto
~tructu:e are: (1) a heavy concentration for many
mdustnes at or close to the legal minimums and (2) Rico is determined by the same formula as for main-
a relatively small spread between the minimum wage land jurisdictions. However, because of the high rates
and the average wage. of unemployment, the amounts awarded to Puerto
Rico are higher tban for comparable populations
As of October 1978, manufacturing earnings in
Puerto Rico averaged $3.45 per hour, which was elsewhere. In addition, Puerto Rico has fared com-
about 55 percent of the U.S. average. This com- paratively wel! under the discretionary funded pro-
pares with a $1.31 average in 1966, which was less grams.
than 48 percent of the U.S. average at that time. CETA programs in Puerto Rico are operated
Most of the improvement in Puerto Rican wages tbrough seven local "prime sponsors." Six are cities:
occurred in the late 1960's, with advancement slow- San Juan (in combination with Catano and Guay-
ing in the 1970's. nabo), Bayamon, Carolina, Caguas, Mayaguez, and
Ponce. Al! other municipalities are handled collec-
.Fringe Benefils.-Due to fragmentary data on tively. For FY 1978 funding for various ~ETA
fnnge benefits in Puerto Rico, there is uo reliable operations totaled abont $290 million. Most of the
basis for determining the impact of fringes on over- funds are nnder title 1 and title VI provisions which
alllabor costs. It is also difficult to make valid com- provide temporary employment; participants nnder

41
these two titIes nnmber about 28,000, or approxi- are set on an individual industry basis, and, if con-
mately 3 percent of the labor force. ditions warrant, may be set at a level below that
Puerto Rico participates in several different youth established for the U.S. mainland. The law provides
employrnent and training programs, sorne of them for frequent periodic increases and regular reviows
established under recent legislation (Y outh Employ- by industry committees, with the objective of raising
ment and Demonstration Projects (Act 01 1977). these rates as fast as economically feasible to the
Allocations for youth programs, each 01 which has statutory U.S. levels. The most recent amendments
a somewhat different purpose and criteria, are by in 1977 established higher statutory levels and a
formula. Most are handled by the same administra- new schedule of annual automatic increases for
tive setup as the CETA programs. In addition to the 1978-81. However, because these automatic in-
employment and training activities of the CETA creases were substantial and exceeded those which
prime sponsors, described previously, job develop- industry committees had recommended in earlier
ment and job finding activities are condueted by the years . the Secretary of Labor, by administrative
Puerto Rico Employment Service, also supported by order, on February 24, 1978, suspended further in-
Federal funds which for FY 1978 amounted to over dustry committee reviews. The impact of the 1977
$4 million. In 1977, more than 81,000 Puerto Ricans amendments cannot be fully assessed at present, but
were placed in jobs through this programo given the operation of the automatic increases, it is
Puerto Rico participates in the Federal/State un- estimated that by J anuary 1, 1981, when the main-
employment insurance program on the same basis as land statutory minimum reaches $3.35, sorne Puerto
!he various States. Each State establishes its own Rican industry wage orders with subminimum rates
trust fund into which employers pay, and also estab- will stilJ remain. However, judging from current em-
lishes qualifications for c1aimants and !he formula for ployment in these categories, the num ber of workers
regular unemployment insurance benefits. Additional involved will be quite small.
benefits are avaialable through a partially federally
financed program which is "triggered" by certain in- Major Problems
sured unemployment rates. The Federal Government
may also loan funds to State trust funds. Require- The major problems-one basic to the entire eco-
ments in Puerto Rico are different in sorne respects nomic future of Puerto Rico-is how the present
than those in most States. For example, Puerto Rico, overall high rate of unemployment can be reduced,
has a very liberal definiíion of "employer," allows at least to its pre-1974 level of approximateJy 10 to
extension of benefits for an additional period in cer- 12 percent. Inc1uded in this basic issue are the
tain industries, occupations or under "special unem- problems of providing employment, particularIy for
ployment" situations, and uses a more generons for- youths, in a constantly expanding population and for
mula in computing partial payments. CurrentIy, with heads of households. Another subsidiary prob1em is
Puerto Rico's Unemployment Insurance Fund in debt the degree to which employment opportunities can
to the federal loan account by $88.7 milJion, eligibil- be provided outside the San Juan area where unem-
ity and qualification requirements are being tightened. ployment is higher than in that urban area.
Specialized training under the apprenticeship pro-
gram in Puerto Rico, as elsewhere, is financed by Policy and Program Options
industry. The Federal Government's role is limited
primarily to establishing standards to protect the Federal Government Options.-As indicated, the
we!fare of apprentices and to serving as consultants. Federal Government provides considerable assist-
Currently, there is a heavy program concentration in ance to Puerto Rico under numerous programs
a few occupations and very little use of the program aimed at improving employment. Funding levels 01
in many occupations. these programs by and large are either at or aboye
the levels of similar programs on the U .S. mainland.
Policies and Prograrns Affeding the Wage Struc- Considering present legislation, overall U.S. budget
ture.-Various U.S. policies and programs directIy constraints, and the fact that these programs are op-
affect the wage structure of Puerto Rico: the mini- erated locally, Federal options appear limited.
mum wage legislation; programs that train people There are, however, sorne things which the Fed-
for better paying jobs; programs that result in pro- eral Government can do. These inc1ude stepping up
ductivity improvements; the measurement of the the work undertaken by the U.S. Bureau of Labor
cost of living (on which wage increases are based); Statistics to review Puerto Rico's statistical data with
and assistance in collective bargaining involving the aim of improving its reliability and its com-
wage adjustments. ParticularIy significant is the Fair parability with U.S. data. Assistance might also be
Labor Standards Act (FLSA). provided in efforts to fill data gaps. Special assist-
Under the FLSA, mínimum wages in Puerto Rico anee might also be given by Federal officials, who

42
can draw on their experience of other areas of high ural population growtb rate is abaut 1.7 percent,
unemployment, in counseling Puerto Rican "prime approximately the rate of the world as a whole, but
sponsors" on ways in which. their efforts can be made much higher than the U.S. rate of 0.6 percent.
more effective and responsIve to local needs. Mom- Substantial net irnmigration in recent years has
toring of wages and re1ated development should con- raised the overaIl population growth rate to the 3
tinue. percent level. Moreover, a high percentage of the
population is young; about 60 percent of the popula-
Puerto Rican Govemment Optiúns.--Since the
tion is under 25 years of age. The overaIl unemploy-
various manpower programs are operated locally, the
ment rate has been between 15 and 20 percent in re-
puerto Rican Government undoubtedly has sorne
cent years and has been 50 percent for youth.
options in making administrative and delivery im-
provements so that the greatest possible benefits are The educational status of the population is lower
obtained from the funds expended. A thorough re- than !hat of the U.S. mainland. The iIIiteracy rate is
view may reveal, for example, the need tor greater 11 percent (compared to less than 2 percent in the
coordination between the various programs to pre- United States as a whole) and is compounded by a
vent duplication or for devising new ways to reach lack of English and Spanish language skilIs among a
unemployed youth not currently enrolled in any of significant portion of tbe population. Eighty-five per-
the programs. cent of school age children are enrolled in school; the
average school years completed is 7. School facilities
In particular it would appear !hat special efiorts are inadequate and the number of trained teachers is
to work cIosely with private industry to create more lirnited. The number of colIege graduates is large, but
jobs and to provide more apprenticeships and other many graduates are finding it difficult to obtain work.
on-the-job training would be helpfuI. Broadening the The higher educational system provides IittIe tech-
apprenticeship program to cover additional occupa- nical training and there is insufficient vocational
tions, for example, is one specific option of this type. training at !he secondary level.
Other characteristics of social conditions in Puerto
Rico, reflecting in part its rapid industrialization and
SOCIAL CONDITIONS AND HUMAN shift to urban living, are weakened family stability
(indicated by a high divorce rate and the fact that
SERVICES
more than 15 percent of the families are headed by
a single parent) and an increasingly serious mental
This sector study covers the human weIfare area
health problem.
-health, education, income security, and human
development services. These subjects are cIosely re- The human services sector, which provides heaIth,
lated to the economic development of Puerto Rico. education, and human development services as welI
as income security assistance to Puerto Rico resi-
dents, is based on mutual cooperation among !he
Overview Puerto Rican and Federal Governments and the pri-
vate sector. The public medical care system serves
Puerto Rico has made great strides over !he years
approximately two-thirds of the population. The edu-
in improving social conditions. Life expectancy has
cational system consists of both public and private
risen dramatically. Mortality rates have been greatly
schools, with an emerging trend toward increased
reduced, with that of infant mortality now only
enroIlments in private schools. The social services
slightly aboye that of the mainland. Whereas in 1940
sector is not as well deve1oped, partially because of
only half the children of school age were in school,
a lack of resources but also because it is organiza-
4 out of 5 are today. CoIlege studen!s numbered only
tionaIly fragmented due, in part, to the categorical
5,000 in 1940; more than 100,000 are now enrolled
in colleges and universities. nature of Federal programs.
Despite these advances, Puerto Rico has signifi-
cant social problems, the most fundamental of which
Impact of Federal Programs
is the extent and degree of poverty. Using the Fed- The Federal Government is the major funding
eral Government's official poverty cutoff, 60 percent source for income security, health care financing,
of tbe island's population are "poor." The under- and student financial assistance programs, and pro-
Iying source of this poverty is an imbalance between vides substantial funds for human development and
population growth and economic growth, resulting in social services, health services, and e1ementary and
persistently high unemployment. Since 1970, the secondary education in Puerto Rico. In sorne Federal
overalI population growth rate has averaged 3 per- programs, U.S. citizens residing in Puerto Rico do
cent per year whereas the real rate of economic not receive the same level of benefits as do those
growth has averaged less than 2 percent. The nat- who reside in the States.

43
The largest income security programs in Puerto Other grants in 1977 inc1uded $16.6 million for
Rico are Unemployment Insurance, Social Security Head Start child development programs, $1.5 mil-
(Old Age, Survivors, and Disability Insurance), Pub- lion for the work incentives program, $1.4 million
lic Assistance Cash Payments (Aid to Families with for child welfare services, $3.0 million for special
Dependent Children and Aid to Aged, Blind and programs for the aging, $25.9 million for vocational
Disabled), and Food Stamps. Residents of Puerto rehabilitation services, and $1.2 million for other
Rico participate fnlly in the Social Security and rehabilitation programs.
Unemployment Insurance programs, receiving more
Interrelationships Among Federal Programs.-In
than $600 million in annua! benefits. However,
Puerto Rico, as elsewhere, activities carried out or
because wages are lower than on tbe U.S. mainland,
expendí tures incurred in one program oEten afiect
benefits under these programs are generally lower
those in another. For example, mental health or
than on tbe mainland. It is estimated that almost 70
family planning services may be provided through
percent of the population is eligible for and 50 per-
either the Medicaid or Title XX Social Services pro-
cent actually receives sorne benefits under the Food
grams as well as in special mental health or family
Stamp Program, which provides more than $600
planning programs. Another example is the use of
million annua!ly in Federa! transíer payments (in
funds from Title I of the Elementary and Secondary
the form of food coupons) to Puerto Rico. The
Education Act to finance diagnostic health services
Public Assistance programs provide relatively small
which are delivered through the school system. Such
cash transfers, largely because there is a Federal
services are authorized under Medicaid, but compet-
ceiling of $24 million for these programs. In addi-
ing demands for these limited funds make it neces-
tion, residents of Puerto Rico are excluded from
sary to use the education funds instead. Hence pro-
benefits under the Supplementa! Security Income
posals to restructure Federal programs to suit special
(SSI) programo
conditions in Puerto Rico must be considered in the
Health Programs.-Federa! assistance for health context of their efiects on one another as well as
services in Puerto Rico exceeded $100 million in their specific purposes.
FY 77. Residents receive full entitlement under
Medicare, which provided $61 millian in benefits in
FY 76. The Medicaid program provides $30 million Major Problems
annually to tbe public health care system. The full sector study, in describing social and
Other Federa! programs provided services in such economic conditions of families and individuals and
areas as mental hea!th, alcohol and drug abuse, the various social programs, identifies many social
family planning, community health centers and dis- problems. The principal ones, which are important
ease control. to Puerto Rico's fnture economic development, are:
(1) an imbalance. between population growth and
Educatiou Programs.-The Federal Government economic development; (2) limitations in ba,ic, tech-
provided more tban $93 million to Puerto Rico in nical, and vocational education; (3) low income
1977 in support of elementary and secondary educa- security and high unemployment; (4) limited finane-
tion. Of this amount, $56 million was made avail- ing for hea!th care; and (5) limited resourees and
able through Title 1 of the Elementary and Secon- narrow focus of human' development services pro-
dary Education Aat of 1965. The 1978 amendments grams_
will increase this to $102 million in FY 79.
Imbalance Between Population Growth and Eco'
Over $100 million of Federal funds was provided nomic Development.-More moderate population
in the field of higher education in FY 1977, through growth may accompany long-terrn economic devel-
the various student financia! assistance programs.
opment and improved education in Puerto Rico-as
Another $12 million annually is provided for voca-
tional education and a variety of grants are made in it haselsewhere. Nevertheless, the high fertility rate,
such fields as bilingua! education, adult education, coupled with the preponderance oí young persons in
and the right-to-read programo the popnlation, means that a marked decline in the
overall population growth rate in the near future
Human Development Service Programs. - The ~annot be expected. With population growth generally
Federal Government provided a total of $60 million outpacing job generation on the island-even in past
for human development services in Puerto Rico in periods of rapid development-this poses a basic
FY 1977. Funds for socia! services are provided economic and, consequently, a social problem.
primarily through Title XX of the Social Security
Ac!. In FY 1977, the grant under this title amounted Education-Basic, Vocational, and Teclrnical.--
to $10 million. At present large numbers of Puerto Rican youthS

44
and adults lack basic reading, writing, or mathe- Program and Policy Options
matical skills. In addition to the deprivation of a
key element of quality of life for individuals, this Opportnnities to improve economic and social
hampers the development of a skilled work force, conditions in Puerto Rico are available to the public
making it more difficult to attract and retain highly and private sectors both within Puerto Rico and on
technological industries. Vocational education both the U.S. mainland. Options range from adoption of
wilhin and outside the school system is underde- broad economic strategies to more modest modifica-
veloped; vocational guidance and counseling, train- tion of administrative practices or programs. Those
ing services and facilities are considered inadequate. options chosen to improve the economic and human
service institutions of Puerto Rico must have certain
Income Security and Unemployment.-The wide- broad features. First, they must be part of a well
spread existence of poverty and the high rate of thought-out developmental strategy which links the
unemployment c1early indicate the need for continu- development of human services to economic develop-
ing programs that provide income support to Puerto ment, extensively involves citizens and private sector
Rico. The basic question is whether the present groups in its planning and execution, and builds on
programs (unemployment insurance, Secial Security Puerto Rican culture and institutions. Second, !he
benefits, public assistance cash payments, food relationship between the Federal and Puerto Rican
stamps, subsidized housing, etc.) are adequate-- Govermnents in the improvement effort should be
either alone or in combination with economic de- that of mutual cooperation. Most of the basic deci-
velopment measures-to meet Puerto Rico's needs. sions must be made by Puerto Rico. Federal efforts
For many Puerto Rico residents, the present income should complement Puerto Rican development ac-
support system is inadequate because of low benefit tivities; and an efiort should be made to eliminate
levels and gaps in coverage. However, increases in
Federal impediments to planning for the develop-
cash transfer programs alone will not solve lhe basic ment of the social and economic infrastructure.
cause of poverty-unemployment.
In lhis summary the options discussed relate to
Health Care Financingand Delivery.-While sig- the major problem areas outlined aboye. Many addi-
nificant improvements have been made in health tional options are inc1uded in the full sector study-
status and an extensive public health care system "Social Conditions and Human Services Programs in
has been established, there are still problems of Puerto Rico."
insufficient financing, maldistribution of health man-
power, and inadequate planning. In addition, sorne Promoting Balance Between PopuIation Growth
and Economic Development.-Options concerning
conditions which are amenable to primary care and
industrial and agricultural development and job
preventive health measures remain-infant mortal- creation are found throughout !he Federal study on
ity, low level of child immunization, and widespread social and economic conditions in Puerto Ri~. The
mental health.-problems. basic option considered here is whether, in addition
Human Development Services.-As on the main- to economic development efforts, increased family
land, the social services sector is not as well devel- planning activities should be undertaken as a means
oped as other human service sectors, because only of achieving a greater balance between populatíon
growth and economic development. This is primarily
limited resources are allocated to it and because lhe
a Puerto Rican decision, involving perceptions of
particular services are narrowly focused on special overall priorities and the probable success of its
problems. Human development services are needed economic strategy for the future.
by a wide variety of populations, for numerous If it is decided to take steps to moderate the cur-
difierent problems and purposes. These range from rent population growth, the Federal Govermnent
planning and advocacy on behalf of the aged or could assist through increased fnnding for family
retarded, to child care and child welfare, to voca- planning services. Sources for possible increased
tional rehabilitation and inhome care of the home- Federal fnnding are: Title X of the Public Health
bound. While !he necessity exists to increase !he Act (the Family Planning Program); Tille XX (!he
level of resources associated with Federal programs, Social Service Program) of !he Secial Security Act;
that course by itself will contribute only partially to the Maternal and Child Health Program; the Medi-
solving the human development problems. Federal caid Program; and, for repeat pregnancies, !he re-
categorical programs which provide specific services cently enacted Adolescent Health Services and Preg-
nancy Prevention Programo
to particular groups of people may constrain efiorts
by Pnerto Rico to focus human development serv- Focusiug on Educanon.-Puerto Rico will need
ices on those areas of greatest need. to decide whether to devote greater efforts toward

45
improving basic elementary and secondary education dren (AFDC) and Aid to Blind, Aged, and Disabled
as a way to promote both social and eeonomic de- (Adult Categories).
velopment. Improvements may involve sorne in-
Enhancing Hea1th Care Financing and Delivery.
crease in allocation of funds, but also important are
-There are three broad approaches which Puerto
improvements which can be accomplished through
administrative changes, including broader citizen Rico could take with respect to health care: improv-
ing the public health care system, coordinating pub-
participation. The Federal Government could help
in the overall improvement of primary and second- lic and private sectors through improved planning,
ary education; the 1978 amendments to the Ele- and addressing specific health problems. With a rela-
mentary and Secondary Education Act, which calls tively successful public health care system already
for increased funding under title 1 through a change in place, and a large medically indigent population,
it is appropriate for Puerto Rico to continue to
in the formula for Puerto Rico and the provision of
special grants to areas with high concentrations of
low income families, is particularly pertinent.
support and improve its public system. Improving
the public health care system will require increased
funding and redistribution of health manpower. Ad-
I,
Puerto Rico also will need to decide whether to ditional resources may be available to Puerto Rico
give high priority to the organization of a major as economic development takes place. In the mean-
campaign to inerease vocational skills. Such a pro- time, it may be necessary to look to the Federal
gram might dosely involve business in order to pro-
vide the type of training needed to enter the chang-
ing Puerto Rican job market of the 1980's. The
decision to allocate larger amounts of its own Gov-
Government for additional support. Options for the
Federal Goveroment indude raising the Federal ceil-
ing and matching rate for Medicaid, substituting a
program aimed at priority medical and administra-
I
~
¡
,
eroment funds fOor this purpose is c1early a Puerto tive problems of the public health care system, or
Rican Ooption. Federal technical assistance in design- modifying other Federal health programs to make
ing the program may be desirable. Any increased them more compatible with conditions and with serv-
Federal expenditures for implementing a broad voca- ice delivery systems in Puerto Rico.
tional training program, however, would require new Current health manpower is not targeted to areas
legislation. of greatest need. Options include providing incen-
Income Security and Unemployment.-Puerto Ri- tives to encourage health professionals to enter the
can options are somewhat more Iimited here since field of primary care and locate in underserved areas.
most Oof these prOograms are basically Federal pro- Additionally, better coordination between the pub-
grams which have been extended to PuertOo Rico. lic and private sector could be achieved through
However, many programs require matching funds. improved planning. Options inc1ude reorganizing
This means that both the responsibility for contrib· health planning based Oon a change in the Health
uting funds and the improvement of the management Systems Agency and the State Planning Agency
of the programs which are administered locally, falls relationship.
heavily on Puerto Rico. Finally, specific health problems require immedi-
Puerto Rico could establish a basic policy iu this ate attention. Options indude developing a special
field to emphasize service and job creation over program for reducing infant mortaHty, possibly
income transfers. Services would provide jobs di- using expanded Federal funding from Medicaid or
rectly while building up necessary social infrastruc- Maternal and Child Health. A joint Puerto Rico-
ture (e.g., schools and employment training) and Federal program has been implemented to address
improving the capacity for economic development. the problem of low levels of child immunization.
Improvements in services for mental health might
With regard to the income security programs involve a restructuring of Oorganizations providing
themselves, the study sets out two options. One op- alcohol, drug abuse, and mental health services and
tion is the development of a wage subsidy program additional funds for these services with an emphasis
which could be targeted to certain groups of work- on prevention and education.
ers, if such a program is found fe asible through
further analysis and pilot testing. An experimental Restructuring Human Development Services.-
program could be developed cooperatively by Puerto Options for human development services involve
Rican and Federal agencies responsible for labor, restructuring human development service programs
commerce, economic development, agriculture, and in order to develop broadly based and coherent
income security programs, as well as the private service programs for the family, children, youth,
business and labor sectors. Another option is to aged, handicapped, and developmentally disabled.
modify and expand existing Federal programs by What is required is a redesign of social service sys-
permanently raising the ceiling for Puerto Rico tems to identify the most serious prOoblems, support
applicable to Aid to Families with Dependent Chil- the institutions and traditions of the island, develop

46
local cornmunity capacities, and build up the social based service system is the Federal title XX social
service infrastructure. service prograrn which provides greater fiexibility in
Puerto Rico and the Federal Government could deciding how to utilize social service funds. An op-
jointly consider the option of consolidating sorne of tion would be to inc!ude Puerto Rico fully in the
the current Federal categorical programs and using title XX programo An altemative would be to pro-
the funds for a redesigned social service systern. A vide a direct appropriation of Federal funds to
major vehicle for moving toward a more broad1y Puerto Rico for social service.

47
L
·. PartOne: General .L;;.I"""
. Assessment .
-", ..
Acknowledgements
The General Economic Assessment (GEA) was the responsibility of the
Office of the Chief Economist for the Department of Commerce. Chief Economist
Courtenay M. Slater and Deputy Chief Economist William A. Cox directed its
design and provided guidance and review in its preparation.
Staff Economist George Donald Hanrahan oí the Office of the Chief Econo-
mist prepared Chapter I.-Summary and Findings, and the portions of Chapter II
entitled Trends in the Gross Domestic and National Products, Inflation in Puerto
Rico, and Savings and Investment. Economist Martha Davis, Special Assistant
to the Chief Economist, contributed the Employment and Labor Markets and the
Government sections of Chapter II, and Staff Economist Joseph G. Carson pre-
pared Chapter II on External Trade. Study Director William B. Pounds and
Randolph Mye, a member of the Puerto Rico Study Staff, made numerous helpful
suggestions throughout the preparation of the GEA.
Chapter IV, entitled Land, Mineral and Water Resources, was the composite
contribution of fue Department ·of Agriculture and the Department of the Interior.
The land section of the chapter was developed under the direction of Ted Moriak,
Program Analyst, Office of Budget, Planning and Evaluation, U .S. Department of
Agriculture. Agricultural Economist Shirley Elliot of the Soil Conservation
Service was responsible for much of the analysis and Frank Besosa, Special
Assistant to the Secretary of Agriculture in Puerto Rico, assisted extensively in
making arrangements for interviews and data sourcing used in the study. The
discussion of minerals was the work of Charles C. Hoyt, Chief, State Liaison
Program of the Bureau of Mines. The water resources analysis was written by
Assistant District Chief H. Jack McCoy under the direction of former District
Chief Ernest D. Cobb, both of the Caribbean Water Resources Division of the
U.S. Geological Survey. The water aulysis relies heavily on material prepared by
Hydrologist Fernando Gomez.
Data for the GEA were provided almost entirely by the Puerto Rico Planning
Board. For the many services involved in this function, inc1uding occasional
in terpretations of definitions, the gratitude of the analysts must be extended to
Miguel Rivera-Rios, President of the Puerto Rico Planning Board; to his assistant,
Suriel Sanchez; and to staff members Rosendo Miranda, Leandro Colon, and Oiga
Martinez. Regarding other data, a note of appreciation is due Rita M. Maldonado,
Associate Professor of Finance and Economics, Graduate School of Business, New
York University, who kindly perrnittéd use of Puerto Rican income distribution
data taken from her publication.
Last, but nonetheless significant, recognition must be given to the many Puerto
Rican professionals-unfortunately, too numerous to mention here-from the
Government, academic, and business sectors who assisted indirectly, by way of
interview mainly, in formulating varied perspectives for the analysis.

50
PART ONE:
GENERAL ECONOMIC ASSESSMENT

51
Table of Contents
Part One: General Economic Assessment
CHAPTER I.-SUMMARY AND FINDINGS ____________________________________ 53
Intro duction _______________________________________ ~________________________________________ 53
Majo r Issues _________________________________________________________________________ 53
Constraints in the Economy ________________________________________________________ 53
Summary of Findings Re1ated to the Major Issues __________________________ 54

CHAPTER II.-THE GROWTH PROCESS IN THE PUERTO RICAN


ECONOMY 1947-77 _______________________________________________ 61
Introduction ________________________________________________________________________________ 61
Trends in the Gross Domestic and N ational Products _________________________ 61
Employment and Labor Markets _______________________________________________________ 70
Inflation in Puerto Rico ________________________________________________________________ 75
The Government Sector __c________________________________________________________________ 82
Saving and Investment ____________________________________________________________________ 88

CHAPTER III.-EXTERNAL TRADE __________________________________________________ 101


Introd nction ________________________________________________________________________________ 1O1
Directions of Trade _______________________________________________________________________ 101
Composition of Trade __________________________________________________________________ 103
Import Problems ______________________________________________________________________________ 104
Export Problems ____________________________________________________________________________ 108

CHAPTER IV.-LAND, MINERAL, AND WATER RESOURCES ______ 111


Land ____________________________________________________________________________________________ 111
Mineral Resources ___________________________________________________________________________ 120
Annex Enclosure to Mineral Resources ___________________________________________ 122
Water Resources of Puerto Rico _____________________________________________________ 128
,'--.

Chapter I.-Surnrnary and Findings


INTRODUCTION CONSTRAINTS IN THE ECONOMY
Although the perception of what constitutes a
Puerto Rico has experieuced rapid economic serious constraint on further economic deve!opment
growth since World War II but, Iike most of the in Puerto Rico is open to interpretation, several fac-
world, has found difficulty in sustaining high growth tors would seem to impose barriers of sorne general
in the current decade. Although sorne signs of slow- importance. Among these are:
ing growth were evident prior to 1974,' the oil crisis
and the ensuing deep worldwide recession slowed, 1. The island is near1y devoid of commercial re-
and even retarded the real growth rate, and caused sources, inc1uding energy;
the unemployment rate on the island to soar to more 2. A significant portion of the labor supply re-
than double the 10-percent level that had prevailed mains unskilled;
in the ear1y seventies. The severity of these setbacks 3. The minimum wage rate will be raised to parity
reduced confidence among foreign investors in Puerto with the U.S. mainland by 1981;
Rico as a site for investment and raised many ques- 4. Puerto Rico does not conduct independent mon-
tions about the future strength of the economy. In etary or trade policies; and
this regard, however, Puerto Rico shares in the cli- 5. The island's trade is subject to high shipping
mate of economic uncertainty that has prevailed costs to and from the U.S. mainland.
worldwide since the early 1970's.
With the exception of the third, these constraints
have largely delimited and shaped the character of
MAJOR ISSUES the Puerto Rican economy. The economy is very
open, being heavi1y dependent on the importation of
This General Economic Assessment (GEA) finds raw materials. Its energy requirements are supplied
that four major issues confront the Puerto Rican almost entirely by imported oil. Much of the capital
economy. These issues are: and the technology used in its manufacturing indus-
tries are likewise imported, most from the mainland.
1. Can the economy resume and sustain a high Total merchandise imports were in excess of 70
rate of real growth? percent of the gross national product (GNP) in recent
2. Can the high rate of unemployment be reduced? years. As return trade, the island's merchandise ex-
3. Does the economy rely too heavily on the Unit- ports amounted to about 50 percen! of the GNP.
ed Sta tes for finance and trade? Sorne of the exports, !he more traditional ones, such
as textiles, appare!, shoes, and tourist service, are
4. Is the income distribution too unequal?
labor-intensive in nature; but the predominance of
These major issues, of course, subsume numerous exports tend to be capital-intensive. Among the !alter
and important subissues. Furthermore, the four is- type are pharmaceuticals, scientific instruments, and
sues are not independent of one another. As a result, petrochemicals.
one must consider that "tradeoffs" exist between Although the anticipated rise of!he minimum wage
combinations of the implied obiectives underlying the rate might be expected to have a greater impact on
issnes.-that is, real growth, employment, the degree the labor-intensive industries and cause a lessening
of external finance and trade, and the equality of the of Puerto Rico's competitive position, the resulting
income distribution. How objectives or criteria such impact cannot be that clear1y assumed. One reason
as !hese relate to effective policy formulation is briefly is the fact !hat many of the industrial average wage
discussed at the conc1usion of this summary chapter. rates exceed the minimum by a considerable margino
Secondly, productivity growth could at least to a
1 Annual dates in the discussion refer to the official fiscal year llsed degree ameliorate any wage rate increases that might
in Puerto Rico-July 1 through June 30-the year designation being
of the latter date. be experienced; thus unit labor costs may no! be

53
adverse1y affected by the wage rate increase. The which must be decided before any existing oil poten-
service sector of the economy, however, where pro- tial could be activated.
ductivity increases are much more difficult to come Water is a resource of great importance for indus-
by, would generally be much more vulnerable to the try and agriculture as weIl as for individual consump-
minimum wage rate increases. Unless demand for tion. A natural allocation problem arises in respect
services can advance rapidly enough to stimulate to the use of water in Puerto Rico because the north-
increased dernand for service labor there is the possi- em half of the island receives considerable rainfall
bility that the minimum wage rate increase could while the southern half receives very little. Proble-
cause unemployment of such workers. matic temporal and spatial variations of water sup-
Any discussion of the competitiveness of Puerto plies exist across the island because of this pattem
Rican industry must view the situation in respect to of precipitation. ' A second allocation problem de-
both mainland and foreign producers. Puerto Rico's velops from the fact that no less than 23 agencies of
economic policy is limited for the most to manipula- the Commonwea!th Govemment and the Federal
tion of corporate tax exemptions under the Industrial Govemment are involved in water management on
Incentives Act (HA) and to front-end subsidization the island.
of newly operating firms. Although it does not have
a trade policy of its own, Puerto Rico lies within the
United States customs area; and, consequently, it
SUMMARY OF FINDINGS RELATED
participates in the protection the area has to offer. TO THE MAJOR ISSUES

Land and Natural Resources Econornic Growth Potential


One of the constraints introduced aboye that Although the Puerto Rican economy experienced
shaped the deve10pment of the Puerto Rican econ- several years of extremely rapid real growth without
omy is the island's poor endowment of natural re- rapid inflation in the post-World War II era, real
sources. In chapter IV land, minerals, ·and water growth in the future is expected to be more moderate.
resources receive special attention. This summary Given the openness of the Puerto Rican economy,
merely stresses that several problems exist for Puerto particularly towards the mainland economy, the is-
Rico regarding its resources. Only 25 percent of it is land's future economic growth wilI necessarily be
arable at the presen!. Although a substantial part of cIose1y linked to world and mainland economic con-
the island is mountainous and not suitable for farm- dítions. Trend growth rates in the United States are
ing, much of the land problem stems from the de- expected to be moderate in the 1980's, a result of
emphasis of the agricultural sector which occurred recognition of the inflation threat that rapid stimula-
under Operation Bootstrap, the industrialization pro- tion of economic growth can create and also the
gram fostered by the Govemment after World War slowing of the labor growth because of demographic
H. As a result of the program, a large portion of changes. Granting that the industrial economies of
Puerto Rican farmland was no longer cultivated and the world can sustain moderate growth without se-
subsequently feIl into neglec!. This disengaged land rious inflation, the study forsees no fundameotal
would have to be rec1aimed if a renewal of agricul- change in Puerto Rico's particular conditions that
tural development were to be pursued as a govem- would thwart the possibility of keeping real growth
mental policy. The Govemment's current experimen- up to satisfactory rates. Real growth between 5 and 6
tation with rice production is an example of the kind percent annually seems to be a reasonable expecta-
of effort that might have to be further extended if a tion. The economy's recovery from the seriously
revitalization of the agricultural sector is seriously depressed conditions of the mid-1970's appears to
attempted. be complete. This flnding of ample potential for
Excepting copper and nickel, the mineral deposits moderate1y strong growth is premised on continued
of Puerto Rico are trivial. The copper resources ap- rise of the incremental capital-output ratio (ICOR)
pear to be of high quality, but the low world market at its recent pace and arate of capital formation that
price of copper in recent years has not made the is fe asible in terms of historie performance? The
exercise of mining rights profitable. Furthermore, expected growth potential described has already been
environmental control controversies have retarded partially confirmed. In 1978 the real GNP advanced
the development of these mineral sources. It is 5.3 percent; and, at the time of this writing, the real
c1aimed that oi! deposits exist offshore, but recent growth rate for 1979 is possibly higher.
surveys indicate that, if they exist, they lie in areas One further factor reinforcing the view that more
of such deep water that the cost of extraction might l Chapter IV contains a water budget for Puerto Rico tbat shows
be extremely high. Whether title to the oi! deposits the system oí SQurces and uses of water supplies.
2 A detailed ana1ysis supporting this finding is presented in the clos-
lies with Puerto Rico or the United States is a matter ing section of chapter II.

54
moderate real growth is in store for Pnerto Rico is absorb satisfaetorily the island's rapidly growing
the ontlook for constrnction activity which appears labor force. However, the developing manufacturing
to have somewhat weaker growth potential for the sector under Bootstrap similarly failed to open up
immediate future than in the pas!. The level of per- enough jobs. Actually, it was the large emigration to
formance and the rate of growth of constrnction the mainJand that provided the "safety valve" for the
expenditures before 1975 was impressive. At that economy's labor force and accounted for much of
time manufacturing and tourism were expanding the drop in unemployment in the 1950's and 1960's.
rapidly and heavy governmental investment in the Despite the fact that the mainland absorbed a
basic infrastrncture of the economy was taking place. considerable portion of the growing labor force,
If constrnction in both the private and the govern- Puerto Rico's nnemployment rate continued to be
mental sectors expands with less vigor than was re- high. A jobless rate of 10 percent seems to have been
fiected in the investment boom years, the stimulns the minimum attainable in recent years. During the
for income and employment growth coming from recession of 1974-75 unemployment more than dou-
constrnction would likewise be moderated. Although bled that level. A large portion of the unemployment
possibly occurring at a reduced pace from that of the iu the recession was concentrated in the construction
past, further development of the infrastrncture in industry. The sharp reduction in constrnction em-
Puerto Rico does seem plausible, particuJarly in the ployment was partially attributable to a cutback in
roral areas." In addition to this possibility, added condominium and apartment building as well as to
impetus to the economy could come from more in- substantial decline in industrial investment. Federal
tensive development of industry and agriculture in funding under the Public Works Employment Act of
these areas. A shift of emphasis in development away 1976 was provided to help revive building activity.
from the urban sector would depend on new policies It is somewhat uncertain what source will sustain
moving in that direction, particularly with respect to construction activity after these projects are com-
the deveiopment of agriculture and natural resources. pleted.
Although the Puerto Rican economy has grown The high level of unemployment in Puerto Rico
significantly faster in 1978 and 1979 than in 1977, constitutes a serious challenge to policy formulation
the recovery of the constrnction industry is still in- to correet the problem. There exists considerable
complete. Extensive apartment and condominium nncertainty, however, concerning the full nature and
constrnction had occurred in the days prior to the the measurement accuracy of the extent of nnem-
crisis of the 1970's. The inventory of such constrnc- ployment. One basic source of this uncertainty is a
tion may now have been rnn down sufficiently to key possible exaggeration of the figures on returo migra-
a new stimuJus. For the long rnn, however, one mnst tion to the island. If the labor force is estimated using
ask whether or not the growth of residential constrnc- overstated immigration levels and even if the employ-
tion can sufficiently augment indnstrial and public ment figures are reasonably accurate, an exaggerate~
construction in order that the constrnction sector unemployment percentage would result. A second
might provide a reliable and significant long-rnn source of uncertainty about the unemployment rate
impetus to economic growth in Puerto Rico. relates directly to the unemployment survey tech-
An additional infiuence on the rate of growth in nique. Problems arise regarding the household sur-
the economy is the outlook regarding the budgets of veys as to whether the questions asked about job
the governments and the pnblic enterprises. Except searches and employment experience are being prop-
in the recession, public spending and employment erJy interpreted by respondents and whether the
have grown very rapidly for several years and helped sampling procedure is sufficiently reliable. The ebb
to boost private sector activity. A more conservative and flow of the college student labor force between
expenditure policy in the public sector in the future the island and the U.S. mainland is also an important
would have a moderating eJIect on economic growth. matter requiring further understanding.
Lastly, the rate of real growth will be affected by Although it is rather obvious that large numbers
the intentions of outside investors regarding the ex- of the nnemployed are responsive to conditions of
pansion of their present facilities in Puerto Rico and demand shifts in the economy, it is tempting to
development of new sectors in the economy. interpret the unemployment in the 10- to 12-percent
range (and even beyond), a range whieh spans the
minimal rates experienced sinee 1947, as representihg
The Unemployment Problem strnetural unemployment. Many of the unemployed
Under Operation Bootstrap Puerto Rico's mono- are rural dwellers whose labor was nnabsorbed by
erop agricultural economy of the pre-World War II the industrialization of the island. But whether struc-
days was abandoned. That economy had failed to tura! changes are accountab!e for the "hard core"
range of nnemployment hinges, for one thing, on the
• 8 Regional sewerage systems' development should assist in thls regard
m the next 5 years. removal of sorne of the uncertainties described sur-

55
rounding the accuracy of the measurement of the ers in Puerto Rico were enjoying wage rates aboye
employment situation on the island. But beyond that, the mainland minimum of $2.65 per hour. In the next
further investigation of the socio--economic profiles of 3 years, however, nearly all Puerto Rican workers
the unemployed and their turnover rates would seem will come under the law. Minimum wage rates will
in order. Further analysis of the re1ationship between rise by an average of 11 percent a year in the adjust-
food stamps and other income maintenance and labor ment periodo
force participation, initiation of studies of the role All of these considerations aside, the problem of
of the family unit and "planned leisure" periods in unemployment is chronic in Puerto Rico and must
labor force participation, and continued investigation be addressed with renewed vigor. Expanding employ-
of the skill levels of the unemployed and demand ment wonld be an important step toward the goal of
requirements are aH areas in which reliable informa- reducing income inequality, although income in-
tion is critical to effective policy formulation. equity is notoriously difficult to change. It also would
Once the structural unemployrnent component is enhance the share of income generated in Puerto
isolated, the next question is how much of the com- Rico going to Puerto Ricans in con trast to that re-
ponent can be traced to skill deficiencies in the con- ceived by foreign providers of capital. Greater em-
text of improvement in technology in the economy ployment creation would also assist in reducing the
and how much is basically frictional in character or number of Puerto Ricans dependent on Federal
representative of a partial participation in the labor transfer payments for subsisten ce.
force. Regarding the latter question, for example, it Increased employment can be encouraged by more
has been contended tha! sorne of the Puerto Rican flexible use of tax incentives. In the past, tax prefer-
unemployed demand reservation wage rates in excess ences have been extended mainly to the suppliers of
of what is realistic. How relevan! this hypothesis is capital. In the future, tax incentives conld be extend-
in explaining the heavy unemployment remains, like ed in consideration of the employrnent generated by
the other questions cited, an important matter. an enterprise. Initial construction employment might
The question of how the skill level of the labor be considered, of course, as well as permanent op-
force affects economic development and unemploy- erating jobs involved.
ment in Puerto Rico cannot be answered easily. On
the one hand, the median of years of schooling is Trade and Capital Inffow
less in Puerto Rico than on the U.S. mainland. None- External trade is extremely important to the wel-
theless, the island possesses a college-educated cadre fare of Puerto Rico. The island's economy depends
proportionaHy equivalent to that of the mainland.
heavily on the inflow of external capital and on the
College education in Puerto Rico, however, is more imports of technology, raw materials, and consumer
often in liberal arts rather than engineering, business
goods, which account for a substantial portion of
administration, or applied sciences, areas which
total consumption on the island. Puerto Rican indus-
might be able to provide more immediate economic
try relies mainly on export markets to sell its
returns to both the students involved and the econ-
production. In sum, external trade is the "lifeblood"
omy at large, by enhancing labor productivity. The of the island's economy.
average educational attainment of persons without
college training being substantiaHy lower for Puerto
Ricans than for the corresponding group in the
Capital Inffow
United States results in a scarcity of technicians and The extensive reIiance of the Puerto Rican econ-
skilled workers. This is a constraint on growth and omy on external capital Ieads to important conse-
productivity advancement. These conditions produce quences. The economy's direction is guided in many
what on first glance seems to be an anomaly; a tight ways by the outside decisions of mainland firms to
labor market existing within an environment of se- invest or no! to invest on the island. This situation,
riously high unemployment. The answer lies, how- together with the great interdependence of Puerto
ever, with the realization that much of the labor Rico with world economic conditions, means that
demanded is for semiskilled and skilled workers. Puerto Rico's economic policies are executed in an
Another factor bearing on labor use in the fnture environment dominated by uncontrollable outside
in Puerto Rico is the possibility that the wage rate influences.
structure could rise because of increases in minimum There is no apparent alternative, however, to
wage rates. Currently, each industry in Puerto Rico reliance on outside capital. The island economy is a
has its own minimum wage. Under recent amend- net dissaver, and the prospect that the island will
ments to the Fair Labor Standards Act, the mínimum bring forth substantial domestic net saving in the
wage rates in most industries in Puerto Rico are to near Juture appears dim. Internal saving could be
be raised toward parity with the United States by forced through greater taxation and larger govern-
1981. In 1977 about two-thirds of alI covered work- ment surpluses, allowing that the increased surpluses

56
would not depress income and employment. The Given present technology, Puerto Rico's economy
Government could divert the added tax revenue to- must rely entirely on imported petroleum, with OPEC
ward investrnent. The principIe of seIf-financed in- countries being the main suppliers. As long as this
dustrialization could be foIlowed. The multiplier dependency on foreign oil remains, the perfonnance
effect of higher government investment balanced by of the economy wiII depend cIirect1y on the pricing
higher taxespresumably would not contribute as policies of the oil-supplying nations. Long-term
much to overaIl economic activity as the multiplier alternative energy sources might aIleviate the de-
effects ensuing from private sector investment, for- pendency. Among the alternatives to oil in Ihe long
eign investment, or exports. AIIowing that additional tenn are solar, wind, coal, nuclear, and possibly
internal saving might be stimulated by appropriate ocean wave energy.
policies, the fact remains that. n;ost ec~nomi~s now Changes in Ihe composition of Puerto Rican im-
passing through an era of rapld mdustnahzatlon are ports c1earIy reflect the transformation toward a
doing so, as Puerto Rico, with the aid of substantial manufacturing economy. In 1950, consumer goods
inflows of external capital. accounted for roughly half of total imports and
food imports made up one-quarter. As the industrial
Exports and Imports development proceeded, Puerto Rico's appetite for
raw materials and intennediate prodncts grew ex-
Most of Puerto Rico's trade is with the United tensively, so that, by 1970, these goods constituted
States. The mainland has been the key market for about 54 percent of total imports, while the con-
Puerto Rico's exports. In 1950, for example, 95 sumer goods portion had dropped to 34 percent.
pereent of aIl Puerto Rico's exports went to the
U.S. mainland. AJ.though sorne diversification in the
destination of exports has taken place since 1950,
Government
!he U .S. mainland continues to be the dominant Both the Puerto Rican Government and Ihe U.S.
destination. In 1977, the United States was still re- Federal Government play very important roles in
ceiving about 86 percent of Puerto Rico's exports. the Puerto Rican economy. The Puerto Rican Gov-
The composition of Puerto Rico's exports has ernment, in conjunction wilh Federal financing, has
undergone significant changes sinee the early 1950's. directly employed a growing proportion of job
Traditional export products, such as food and related holders. Its investment in public infrastructure and
products (mainly sugar) and apparel made up most its policy of corporate tax exemptions have helped
01 her exports during the 1950's. The share of total to stimualte the economy's growth for many years.
exports attributable to these traditional items Con- The health sernces, education, and various other
trasted as industrial development proceeded, giving services it provides have raised the Puerto Rican
way to new manufactures. By 1977, manufactured standard of living. Increases in Commonwealth and
goods, such as chemicals and related products and municipal spending have been very large for over
electrical machinery and parts, made up over 40 a decade. The birth and growth of the public enter-
percent of Puerto Rico's exports. prises, which provide additional public sernces,
The direct and important connection with Ihe especiaIly the capital-intensive ones, render the
United States market has made the Puerto Rican growth of the public sector even more striking to
economy responsive to the fluctuating business con- the o bserver.
ditions of the mainland. The diversification of Puerto Despite the increases in governmental activity,
Rican exports by destination could give the economy personal taxes have grown on1y slight1y faster than
a much greater degree of stability in terms of pro- personal income in this decade. This result stems
duction and national income. from the fact that Federal Government supp~rt of
The sources of imports have varied little mOre Puerto Rican Government programs has provided a
than the destination of exports since 1950. Prior significant external source of financing, and because
to 1973, Puerto Rico reeeived about 90 percent of some of the growth in investment spending has been
her imports from the United States. Given her heavy financed by issuing debt instruments.
reliance on imports of petroleum from olher sup- The rapid growth of government operating ex-
pliers, however, the oil price hikes of 1973 and 1974 penditures is a controversial issue in Puerto Rico.
changed the pattern of origin of Puerto Rico's im- This growth has been due partiaIly to significant
ports dramaticaIly. The value of oil imports bal- government employment increases and partially to
looned from abaut 7 percent of total imports before largo pay inereases for government employees which
:973 to abaut 25 percent today. This large increase averaged 10 percent annuaIly from 1971 to 1975,
m the oil biII had severe repercussions thronghout although salaries were frozen momentarily at the end
the Puerto Rican economy and was a major factor of this periodo Only in 1972 did employment and
contributing to the recession in 1975. compensation grow comparably. These raises both

57
infiated the government budget and set an inflationary in Puerto Rico. The reliance on progressive personal
example for private wage settlements. 4 They were income taxes and approximately proportional excise
slowed to about 2 percent yearIy in 1976 and 1977. taxes plus the absence of payroll taxes makes the
Growth of other operating expenditures has been tax system slightly progressive. Although significant
subsidized in varying degrees by the Federal Govern- impetus for social programs results from the policies
mento The composition of governmental activity has of tbe Federal Government which favor tbe lower
been modified by tbese subsidies. income groups, the shift of emphasis toward social
Public investment and the debt which financed it services in the Commonwealth budget should also
have grown even more rapidly than the operating help to benefit the lower- and middle-income c1asses
budget. Such spending is not usuaIly snpported somewhat more than the high-income groups.
directIy by the Federal Government and entails a
commitment by the issuing jurisdiction to meet debt Policy Formulation
service payments in the future. The recent excep- The foregoing discussion has raised a number of
tional growth oi public debt has some serious im- policy intervention matters for Puerto Ricans to
plications for tax burden in the future. Determining assess. It is usually helpful to be systematic in such
the optimal level of public investment involves assessments. Economic policy must necessarily be
weighing the benefits of the proiects against tbe conducted within the confines of the existing eco-
repayment costs. To the extent tbat public facilities nomic structure, although some eIements of a policy
are not financiaIly seIf-Iiquidating, the decision
design may tbemselves be directed towards changing
whether the benefits from the investments justify the
the current structure, if only to some small degree.
commitment of public resources must be made by
Outside forces impinging on the economy similarly
the political process. Because Puerto Rican bonds determine policy latitudes. As a result, the economic
are sold on tbe mainland, however, the level of structure and these outside forces together constrain
investment is constrained significantly by the willing-
any policy action. If policymakers are to take mean-
ness of U.S. investors to supply their capital. The
ingfnl action within these constraints, criteria or
future growth of public debt, in fact, could be limited,
goals must be set up iu order to be able to assess
since a conservative estimate of Puerto Rican repay-
policy outcomes. Such criteria are frequently desig-
ment capabilities may govern investors' appraisals in
nated as policy "targets," if indeed any quantitative
Iight of the 1975 upheaval in municipal bond mar-
dimensions can be assigned to them. The devices
kets. Acceptability of Puerto Rican debt has im-
available for implementing policy are frequently
proved with the recovery of the economy and slowing
referred to as the "instruments" of policy.
of debt issuance.
Obviously, if policy action is to be more than a
Temporary tax increases were implemented in
random, spasmodic aotivity, there must be as cIear
1975, however, in an attempt to compensate for the
knowledge as possible of the relationship existing
decline in revenues stemming from the recession.
between the criteria and lhe policy instruments.
Operating expenditures have slowed with the abate-
Otherwise, any policy that is foIlowed may end up
ment of compensation growth and capital expendi-
being more disruptive tban helpful in remedying
tures have actuaIly dec1ined in the past 2 years.
problems. Within the policy framework just de-
Both factors have detracted from private output and
scribed, policymakers find tbemselves faced continu-
employment expansiono However, government em-
aIly with the necessity of balancing the costs of
ployment growth has provided one of the few
sources of new jobs in recent years. certaln outcomes arising from the policy, or persistent
unacceptable circumstances in tbe economy, and the
The Federal Government has become an increas- risks involved in taking action. This balancing por-
ing1y important participant in the Puerto Rican tion of policy decisionmaking is especiaIly difficult
economy in the past decade. In addition to its support when tbe relationships between the policy instrnments
for many of tbe Puerto Rican Government's func- and criteria are unclear, or even completely unknown.
tions, it is a source of substaritial income support The criteria frequently used iu judging economic
for individuals. Federal transfer payments 1ast year progress are fairly well known. Among them are:
constituted nearly 20 percent of Puerto Rico's per-
sonal income (far greater than the 5-percent share 1. the level of unemployment,
in 1970); Federal funds supported about one-third 2. the growth rate of real output or product in
of Commonwealth and municipal operating expendi- tbe economy, aggregate and per capita,
tures. 3. tbe rate of income growth and the degree of
Both government tax and spending policies seem equality of tbe income distribution,
to work toward a more equal distribution of income 4. tbe rate of infiation,
5. the stability of the gross national product, and
"Iníensified union preSSllTe in the public enterprise contributed to
wage increases in that sector. 6. the rate of capital formation.

58
These or very similar criteria need ranking of at the outset of this chapter-as well as to the issue
priority by government policymake.rs in line with of unemployrnent reduction-the second major issue
the policy framework already descnbed. Trade-ofEs mentioned. Involved also in the capital-intensity
must be kept in mind since the policy criteria gen- question is the degree to which the economy should
erally are not independent of each other. (The rank- rely on the mainland for finance and trade-an issue
ing presented aboye is in no way intended to convey described as the third major issue facing the econ-
a suggested order of priority.) In assessing palicy omy. The latter issue relates to the growing diver-
intervention, the Puerto Rican Government, it would gence between the gross domestic product (GDP),
appear, must decide within a similar framework which is the value of the production generated on
whether its present policies are properly addressing the island, and the GNP which is the value of the
and attaining desired goals. Questions such as product available to Puerto Ricans for their final use.
whether or not changes in the structure of the The divergence has grown continuously since 1963
economy, the creation of employment, the level of with the GDP exceeding the GNP. Previous to 1963
capital fonnation, the import and export levels and the reverse was true. The gap with GDP in excess
pattems, and other economic factors are conforming of GNP represents a flow of income going from the
to the specific policy priorities of the Government island, largely to the mainland, and consisting mostly
are important in an overall assessment of economic of profits. The gap also shadows the extent to which
and social progress. Puerto Rico's capital is externally owned and COll-
In Puerto Rico's case, its policy tools consist of troUed. When GNP exceeded GDP (prior to 1963)
the allocation of expenditures through governmental there was a net inflow of income to Puerto Rico,
budgets, controlling of the revenue flow and the set- resulting almost entirely from the wages of Puerto
ting of front-end loading subsidies and exemptions Rican workers engaged on the mainland. These are
under the aegis of the Industrial Incentives Act (HA). important relationships to be considered. Lastly, the
Although no policy recommendations are provided policy options selected by the Govemment would
in this Study, since it is the prerogative of the necessarily have to address the income distribution
Puerto Rican Government to rank their chosen problem which was the fourth major issue the dis-
critería, there are numerous policy options, many of cussion poses as facing the economy.
them based on the HA, presented in the GEA and Depending on the particular priorities set among
elsewhere. the policy criteria, the policy options suggested
A particular ranking of policy criteria made by throughout the Study vary in their appropriateness.
the Puerto Rican Government would imply the "tilt" It must be stressed, however, that even when a policy
which the policy mix is to take in regard to the degree option appears to be the best available for attaining
of capital intensity of industry in Puerto Rico the a certain goal, there is usuaUy sorne disadvantage
Govemment might want to develop in the economy. associated with it. Recognizing this fact is merely
The capital intensity of the industrial structure another way of saying that economic reality, even
naturally relates directly to the growth potential of when viewed within the systematic palicy framework
the economy-which was the first major issue cited suggested aboye, remains short of being ideal.

59
Chapter 11.-The Growth Process in the
Puerto Rican Econorny 1947-77
INTRODUCTION T able 1.-Growth Rates of the Gross Domestic Product,
Gross N ational Product, and Population in Puerto
Rico, 1940-77 1
This chapter examines the overall economic prog- [In percentages]
ress of Puerto Rico in the past tbree decades. The
development of the island's economy is reviewed and Gross Gross
Gross Gross domestic natianal
analyzed in terms of the total product and income, domestic national product product
employment, infIation, government, and the saving Periad product product Popu1ation per capita per capita
and investment process. 1940-47 N.A. 5.06 2.11 N.A. 2.89
1947-63 _.._. ___ 6.66 6.11 0.87 5.74 5.19
1963-73 ........._._. 7.37 6.55 1.64 5.64 4.83
1973-77 _.._._...... 1.66 1.03 3.27 -1.56 -2.17
TRENDS IN THE GROSS DOMESTlC 1947-77 .__ ...__ ... 6.21 5.58 1.45 4.69 4.07
AND NATIONAL PRODUCTS 1 G.rowth rates are average compound annual rates of growth cal-
culated between the terminal dates of the periods indicated, using
constant 1954 dollar estimates of the national product measures.
Since the gross domestic product (GDP) and the
Source: U.S. Department of Commerce; Puerto Rico Planning
gross natioual product (GNP) each convey slightly Board.
difierent information about the aggregate activity of
an economy, both measures of economic performance development is evident in the figure. In the earlier
are useful in a macro assessment, especially when years, the GNP exceeded the GDP, but in the sixties
a substantial divergence exists between them, as is the configuration was reversed. The growth rate of
the case in Puerto Rico. Although a detailed analysis the GDP, on the average, was faster than the GNP
of Puerto Rican employment and unemployment ap- thereafter, and two product measures continued to
pears in a separate section of the chapter, sorne data diverge as the economy grew. Although the GDP
~oncerning the employrnent situation e~ter the dis- frequently exceeds the GNP in developing economies,
cussion in this section as well. A segment of the the relative maguitude of the divergence as it appears
discussion also covers the changes in the composition in the Puerto Rican economy is rather unusual. The
óf the aggregate product and income. An examina- exaggerated divergence of the GDP and GNP is
tion oí these shifts gives a deeper understanding of probably the most definitive reflection of the very
the processes of growth and structural change which close relationship existing between the island's econ-
were so rapidly experienced by the Puerto Rican omy and the U.S. mainland, making Puerto Rico
ecouomy in its post-World War II industrialization. truly a "tandem economy" of the U.S. economy.
. The quickened pace of the Puerto Rican growth The GDP measures the value of the production
. that resulted from the industrialization policy known carried on within the confines of the island in
a~Operation Bootstrap is c1early evidenced in the contrast to the GNP which measures the product
average real growth rates of the GDP and the GNP value available to Puerto Ricans for consumption.
for the selected periods presented in table 1. The As a result, the continuously widening excess of the
performance of these two product measures between GDP over the GNP measures the net outfiow of
1947 and 1977 is illustrated in figure l,1 factor income from the economy. The outflow goes
The marked inversion of the GDP-GNP relation- mostly to the U.S. mainland as the economies return
ship that occurred in Puerto Rico during its economic on the large capital investments made in the island.
In the years preceding the intensification of the
1_ Since the drafting oí this discussion, more recent data for the
Puerto Rican product and income measures have become available. Puerto Rican industrialization policies in the early
!he _data indicate that in 1978 the growth of GNP in real tenns was sixties, a net infIow of factor income had occurred.
abaut 5.3 percent. Indications are that a [ate oí inerease at least as
fast has occurred in 1979. However, the inversion of the GNP-GDP relation-

61
Figure 1 Relationship of Product and Employment
Puerto Rico Gross National Product and
Gross Domestic Product, 1947~77 The massive migration of Puerto Ricans to the
(Constant 1954 Dollars)
5,000,---------------------,
mainland in the early postwar period was described
in the introductory chapter as the "safety valve" for
a swelling labor force which resulted from the popu-
4,500 -
lation increases. Despite the fact that real growth in
the economy was extreme1y impressive--frequently
4,000
Gross Domestic
running aboye 7 percent a year in GDP terms-the
Product Puerto Rican employment situation was only mod-
3,500
erately improved by the economic development, a
point which appears rather paradoxical on first
~ 3,000 glance. Vnemployment remained significant, averag-
"o ing 14 percent between 1950 and 1962. Without
"
ro
~
e
ro
2,500 the relief provided bythe escape route to the main-
land, the unemployment problem would have been
ro Gross National
"o
~ 2,000 Product substantially intensified.
1-
In the fifties, as the economy was engaged in the
1,500
first phase of the transition from a monocrop agri-
cultural system to an industrial system, total employ-
ment contracted. The absorption of labor into the
1,000
Ratio Grass Domestic Product ta Ratio
newly developed manufacturing sector fell behind
Grass National Praduct 1.15 the rate at which agricultural workers were being
500 1.10
1.05 laid off. It was only after 1963 that a persistent
1.00
.95
90 employment expansion was underway. Vnder the
f9'::45~'c,CC95~0C-'--L,CC95:,;5~--;,:!96=0~--;,:!96::'5~--;,c::'97;:':0~-::19::7;-5~-:'::'198·ci85 momentum, spurred mainly by capital investment
Sourca, U.S. Dopt 01 Commerce: Puerto R,co Plannlng B<lard. induced to enter the economy under the revisions
in the Industrial Incentives Act, employment im-
ship transformed Puerto Rico from a net recipient of proved for a decade. Between 1963 and 1973, it
factor income from abroad to a net payer of income increased on the average nearly 3 percent ayear.
to foreigners. The infiuence this transition had on In tbat span of years, the average rate of unemploy-
the saving-investment process is outlined later. ment dropped to just over 12.5 percent as an aver-
Viewing tbe advances of GDP and GNP on a age--still highly unsatisfactory, however. The oil
per capita basis can provide an even more meaningful crisis and the recession of 1974-75 quickly slashed
picture of Puerto Rican economic progress than the in half the 3-percent average annual gain of employ-
ment, experienced in the prior decade. The rate
growth rates of the aggregate measures can reveal.
of unemployment mounted rapidly and averaged 16
As the data in table l indicates, a significant accele-
percent between 1973 and 1977. But the period's
ration of the per capita GNP occurred after 1947. average by no means reveals the extent of the un-
An important factor contributing to the acceleration employment problem that prevailed in 1976 and
was the freedom of the populace to emigrate to the 1977. In those years, the annual average rates
U.S. mainland. The acceleration depended as much reached 19 percent and 20 percent respectively. The
on the reduced rate of net population growtb, per- peak monthly leve! was 22 percent in May 1977.
mitted by the massive emigration after World War JI,
as on the development of tbe economy's production Cyclical Behavior of the GDP and GNP
poten ti al. The per capita data also clearly refiect the
Neitber the GDP nor the GNP had declined in
sharp slowdown of the economy in the oil crisis and
Puerto Rico throughout the economic development.
the recent recession. The deceleration of the growth In 1974, when the oil crisis hit, the real GNP con-
rate of per capita GNP between 1973 and 1977 tinued to rise and even show a rather substantial in-
may be somewhat exaggerated, however. Some evi- crease for the year; but the GDP, on the other hand,
dence suggests that the migration, which is officially recorded a small decline of $2.7 million in constant
reported in Puerto Rico as a net immigration to 1954 dollars. By 1975, however, the severity of the
tbe island in tbis period, may actually have been recession was fúlly evidenced in both product meas-
almost negligible. This observation is based on an ures. The GNP contracted $69 million and the
apparent misinterpretation of information coming GDP dropped $96 million in constant 1954 dollars.
from airline sources that was used in the official The changes were 2 percent and 2.5 percent of their
estimation of migration. respective product levels. These relative amplitudes

62
~_ ..

of contraction were very similar to the cutbacks in Figure 2


gro ss products experienced in the United States, but Comparison of the
the Puerto Rican declines were slightly less severe Real Growth Rates of the Gross Domestic
and the 1976 rebound not as strong as in the United Product in Puerto Rico and the United States, 1947-77
14 ,-------~7~0C------------------------,
States.
13
As was the case with the GNP and GDP, the
effects of the 1973-74 recession in terros of unem- 12

ployment in the two economies were likewise raugh1y 11


EquaJ Growth
equivalent. There was somewhat greater than a 10 63 Rate Une
doubling of the percentage rate of unemployment in
Puerto Rico and nearly a doubling in the United 9 61
65 "
States. In Puerto Rico tbis meant at the peak an 73 5"0
64 "62
unemployment rate of about 23 percent and in the • 66"
United States a level of about 9 percent. As sub- 72
sequent analysis will show, a significant share of the
unemployment increase which surrounded the re-
cession in Puerto Rico was concentrated in the 54 69
construction industry. This industry had boomed in 76
58
the late sixties and early seventies; but overbuilding,
resulting fram concentration on condominiums and
apartments was evident even prior to the recession.
The slumped construction situation carried over into 0~-----~74~·~~-------------------1

the economy's post-recession rebound. Project fi-


nanced under the public works Employment Act of ., 7.5
1976 as amended in 1977 have stimulated construc-
·3
tion activity in the past year; however, construction
employment has not regained Íts earlier levels. _<1 -4:'-";.3--.;;'----'.,'-';;0-';--;;,----'3,-~4--5;--:6--::-7--:6'-';;9-:-',O
Even though the Puerto Rican recession appeared PercentJYear
to mirror the U.S. recession in terros of the relative Real Growth Rate of United States
Gross Domesíic Product
amplitudes of the respective GDP fluctuations," no SOU'C"' U.S. Dept. 01 Cammerce; Puerto R¡co PIMn;ng Boord

valid generalization abaut the equality of relative


variety of recession responses are indicated. In the
responsiveness of the Puerto Rican GDP to the U.S.
GDP can be derived from this rather unique instance. 1954 recession, for example, the real growth rate
The reason why is seen in figure 2 which contains of Puerto Rico's GDP was sustained at the previous
a plot of the growth rates of the real GDP's in each year's level while the United States GDP contracted
of the economies since 1948. A concentration of 3 percent after an increase of almost 6 percent in
points about the 45 o -Iine which bisects the figure 1953. But in the recession of 1958, when GDP in
would suggest an almost perfecUy equivalent and the United States dropped abaut 2 percent, the
correlated response of Puerto Rican GDP changes real growth rate of GDP in Puerto Rico decelerated
to GDP changes in the United States. 3 As it appears, by 2 percentage points. Yet a third example of
however, less than one-third of the plotted points Iie noncorrelation in critcial response can be cited: The
within 1 percentage point of the 45 o -lineo Lt is also 1970 recession which caused the mainland's GDP
clearly evident that, in a number of years, the Puerto
to decline somewhat less than 1 percent was paral-
Rican real growth rate far exceeded that of the
United States; however, the Puerto Rican product, leled by a surge of growth in the real GDP in Puerto
it must be realized, was substantially less than 1 per- Rico--the growth rate rising to 14 percent from
cent of the U.S. product throúghout the periodo about 4 percent in the previous year.
The inequivalence of simultaneous relative GDP The real growth rates for the two economies are
responses in the two economies is quite evident. The plotted in a concurrent relationship in figure 2.
plot shows considerable dispersion of points with However, it seems plausible that a closer response
a preponderance of faster growth in Puerto Rico. A pattern might emerge if the Puerto Rican growth
2The GNP fluctuations in the 1974--75 recession were not completely
rate were to be lagged by ayear, especially since the
paralIel in Puerto Rico and the United States since real GNP in U.S. economy is considered as the driving force of
Puerto Rico was sUB rising whereas in the United States a decline
Was already underway. Puerto Rico's economy. But when the Puerto Rican
3 A massing of points along any other straight 1ine projected from product measure was lagged by 1 year and plotted,
tJ:e neighborhood of the origin would suggest nonequivalence but a
h1gh correlation of the growth rates. a configuration of points with even fewer instances

63
of close correspondence of growth rates resulted. The Sources of Changes in Real Growth
analysis shows that the interdependency of the Puerto
Rican economy on the U.S. economy cannot be gen- The performance of the components of the GNP
eralized simply, certainly not in terms of real growth on an annual basis were analyzed by decomposing
rates of GNP. The preponderance of faster growth the GNP growth rates and by a trend analysis. Such
in Puerto Rico than in the United States exhibited a year-to-year decomposition of the real growth rate
in figure 2 results not only from the faet that a much of the GNP provides an understanding of the ac-
smaller base was involved in Puerto Rico, but largely, counting contributions to real growth. Since the
too, from the fact that the infrastructure of the multiplier in the economy operates on exogenous
eeonomy was being developed during much of the (or shock) changes in the economy, identifying the
periodo The infrastructure growth apparently tended causes of the ftuctuations in the growth rate would
to compensate for the occasional depressing impacts be even more helpful. But that exercise would gen-
resulting from changes in mainland demand for eralIy necessitate specifications of an econometric
Puerto Rican exports. As the external trade analysis model, an analytic sophistication which was not
~ill show later, it is Puerto Rican exports, rather
feasible within the resource limitations of the present
than total product, which tend to refieet more directly analysis. The accounting of the growth contributions,
the shifts in United States product. however, does provide some interesting information
about the GNP movements. The results are presented
Whether the degree of responsiveness of the
in table 2. Each row of the table provides the
Puerto Rican economy to the production level of the
decomposition of the overalI growth rate. The con-
United States wilI remain the same in the future
tribution of a component is estimated by scaling the
is an important matter underlying of the two major
component's change according to the weight it
issues concerning Puerto Rico which were raised
carries in the GNP.
i~ the first chapter of the report-that of the resump-
tlOn of faster growth and the issue of the reliance The ca1culations reveal that the changes in the
of the economy on the mainland. Unless Puerto Rico GNP consisted primarily of additions to personal
launches into a second phase of infrastructure devel- consumption expenditures. These expenditures, how-
opment, it might be expected that the economy's ever, are generalIy dependent on the national income
growth rate in coming years would track the U .S. and are only occasionally the source of exogenous,
conditions more closely than in prior years.4 The or independent, impacts on the total product of the
diversification of Puerto Rican exports by countries, economy. They are more often the effect of the
a trend that has evolved in the past two decades, GNP change rather than its cause. The driving
could possibly dilute the mainland impact. Never- forces of growth are essentialIy the increases in
theless, even if the mainland impact is lessened, domestic investment and exports. The data show
Puerto Rico will doubtlessly be completely depend- that in. several years the fixed investment compo-
ent on world economic conditions, just from the nent dld make a major contribution. After 1973,
mere size of its economy. however, the fixed investment component became a
negative growth factor, because the leve! of invest-
From the aboye analysis, it appears that the ex-
ment actualIy felI. In 1975, exports also added a
tensive development of the infrastructure and the negative impact of some significan ce.
corresponding concentration of produotion in the
investment activity seemed to have precluded any Although data inaccuracy could be responsible
cyclical behavior of the Puerto Rican eeonomy in for some erratic movements, inventory investment
the classical sense of periodicity. The data indicate shifts seemed to have had a variety of impacts on
rather that prior to the 1974-75 reeession the the Puerto Rican GNP and generally added to the
"cyclical" behavior of the economy-if it c~n be
apparent instability of the economy. The accelera-
tion (or deceleration) of the rate of inventory invest-
so termed-took the form of variations in the rate ment creates a positive (or negative) effect on the
of real growth. The nature of the construetion ex- rate of real GNP growth. The causal orientation
pansion and contraction raises the question, never- o.f inventory shifts is very difficnlt to distinguish
theless whether a construction "cycle" was not smce an acceleration of inventory investment may
concealed in the dynamics of the economy in the be intentional in response to rising sales or antici-
past decade or so. A comprehensive exploration pated increases; or the investment increase may be
of the relationship of construction and Puerto Rican mvoluntary or unintentional, causing an inventory
real growth seems a worthy area of research, par- buildup because sales did not eventuate is predicted.
ticularly if future building prospects are inclnded. A similar confounding of planned and unplanned
changes occnrs in the case of decelerations in in-
4. In the next 5 years high leve! investment in regional sewerage
systems will contribute to further development of the infrastructure in
ventory investment. A cutback in inventory accumu-
Puerto Rico. lation may refiect either an intended inventory

64
Table 2.-Component Contribution to Real GNP Growth
[percentage change SAAR1

Gross Personal Gross fixed


national consumption domestic Inventory Net
Year product expenditures Government investment investment exports Exports Imports

1977 _______ 3 ..8 6.4 1.1 -3.0 -2.9 2.2 9.8 -7.6
1976 ______ 1.0 6.7 -0.2 -2.9 0.9 -3.5 0.9 -4.4
1975 _ , ____. -1.9 -1.4 -1.8 -1.4 7.0 -5.3 -8.1 2.8
1974 ______ 1.2 -2.9 -0.4 -1.9 -3.0 9.4 -0.7 10.1
1973 ____ 7.3 7.1 1.8 -3.8 2.2 0.0 12.8 -12.8
1972 _,._______ 4.5 6.5 1.0 0.9 -0.1 -3.8 2.6 -6.4
1971 _______ 6.0 9.3 1.5 2.6 1.3 -8,7 1.0 -9.7
1970 ________ . 8.2 6.3 2.2 5.3 -1.8 -3,8 4.0 -7.0
1969 .. _______ 9.1 9.7 1.4 2.3 1.1 -5.4 3.9 -9.3
1968 _. ___ .___ 5.4 8.2 2.5 1.1 0.4 -6.8 2.6 -9.4
1967 _,_____ 4.7 1.3 2.9 4.6 -3.4 -0.7 5.8 -6.5
1966 ___ .___ 6.7 6.5 0.3 0.4 0.1 -0.6 7.3 -7.9
1965 _____ ._. 8.7 7.2 1.1 4.3 3.0 -6.9 1.8 -8.7
1964 ________ 4.7 9.5 0.6 3.7 -1.3 -7.8 4.1 -11.9
1963 _________ . 8.6 7.3 0.8 1.3 0.1 -0.9 3.9 -4.8
1962 ______ ~_. 7.7 8.6 0.8 3.1 3.6 -8.4 3.8 -12.2
1961 ___ .___ 6.0 3.8 1.5 0.4 -0.9 1.2 4.1 -2.9
1960 _____ 8.0 7.8 -0.2 3.0 -1.4 -1.2 8.2 -9.4
1959 ________ ._ 8.3 7.9 1.1 1.0 2.8 -4.5 2.9 -7.4
1958 __ ,_____ 3.0 2.4 0.3 0.9 0.6 -1.2 0.3 -1.5
1957 _________ 3.1 1.3 2.4 2.5 0.3 -3.4 3.0 -6.4
1956 _._________ 4.1 3.9 0.3 0.5 -0.1 -0.5 4.5 -5.0
1955 _____ ._____ 3.1 4.8 0.9 2.3 0.2 -5.1 1.1 -5.2
1954 __ ~____ 2.1 2.1 0.6 1.0 1.2 -2.8 1.2 -4.0
1953 __________ 6.4 5.2 0.7 0.7 -4.1 3.9 11.1 -7.2
1952 _________ 9.8 2.4 0.6 1.9 2.2 2.7 3.8 -1.1
1951 _____________ 5.3 4.6 1.5 0.9 2.6 -4.3 3.0 -7.3

Source: U .S. Department of Commerce; Puerto Rico Planning Board.

reduction in response to weakening sales, or it may their relative rates oí growth, since they reflect
be unintentional, resulting írom an unexpected in- the rates of change oí the shares. A summary table,
crease in product sales. covering the three significant postwar periods oí
The destabilizing inventory investment shifts in
Puerto Rico are worthy oí a more careíul examina- Figure 3
Components 01 Puerto Rico Gross National Product (GNP)
tion in order to determine the reasons underlying (Constant 1954 Dollars)
the sharp fluctuations and to assess the prospects for
reducing this source oí instability in the future. 1000~~~
500f==
The component analysis also shows that, although
exports provided considerable impetus for growth
in several years, the net impact oí trade on the
economy's growth rates was definitelynegative
throughout the development of the economy, because
imports tended to rise fas ter than exports. Lastly,
shifts of the government consumption component
seemed to have contributed tittle directly to the
overall year-to-year real growth rate, but multiplier
effects would be concealed in consumption impacts,
as in the case of exports.

Trends in GNP Components J\! IV/\


The preceding discussion identified, year by year,
the accounted contributions of the GNP components
to the real growth rate of the total GNP. In the
present analysis, the same components are viewed
in their trend behavior as percentage shares oí L---hf--il-
I Inves!men1
InV~n10ry - - - - - - - - - - - - - 1
the GNP, considered in con&tant 1954 dollar terms.
I
The trends oí the shares are graphed in figure 3. A 1947 1950 1955 1960 1965 1970 1975 1980
ratio sca!e is used in the graph, so the slopes of
the trend lines can be compared directly to determine Source: U.S. Dept. 01 Commerce; Puerto Rico Planning Board

65
Table 'J.-Components as Percentage ShaTes oi GNPt
Gross fixed
Personal Government domestic Invento:ry Net
P-eriod consumption consumption investment investment exports Exports Imports

1947-62 ----------------- 85.8 12.6 17.0 1.9 -17.2 50.1 67.1


1963-73 ----------------- 91.8 15.5 28.5 3.2 -36.9 57.9 95.8
1974-77 ----_.._------- 96.8 19.4 20.1 2.6 -39.3 59.2 98.5

1 Ratios were calculated on 1954 constant dolIar basis; data are average shares for the period designated.
Source: U.S. Department of Commerce; Puerto Rico Planning Board.

Puerto Rican development, which have been cited omy obviously brought increased involvement of
frequently in earlier parts of the report, accompanies the Government in several dimensions, commanding
the graph. a growing share of lhe total product of the economy
The most prominent development among the as time went on. The details of lhis involvement
shares lies in the profile of the gross fixed investment appear in a special section of this chapter which is
(GFI), surging and driving the economy until the devoted to the Government's role in the economy.
share reaches a peak at the turn of the current Lastly, but not insignificantly, the graph also re-
decade, and then recedes to its level of the fifties. veals the decisive uptrend in the consumption com-
From 1947 to the peak in 1972 the GFI share ponent that carne after 1953. From that year to 1977
gained a full 20 percentage points. The peaking of the consumption share rose from 82 percent of GNP
fixed investment in 1971-72 is evidence that the to 102 percent. As will be discussed in more detail
thrust of demand and growth in the economy was in a subsequent analysis of the saving and investment
already weakening 2 or 3 years prior to the recession. process, consumption expenditures in Puerto Rico
have usually exceeded personal disposable income,
The second outstanding change depicted in the so that the household sector has been a net dissaver
profiles is the strong rise in imports. The Puerto in the economy. The net influx of capital, sorne in
Rican economy has been extremely open. Imports the form of Federal transfer payments, allowed the
of goods and services were 60 percent of the GNP expansion of the consumption component while in-
in 1950; reached almost 75 percent in 1960; and vestment in the infrastmcture of the island, as well
lhen continued to grow, exceeding 100 percent in as in manufacturing, and residential capital, was
the seventies. Much of the growth-roughly one-third being undertaken. Consequently, we do not observe
in this decade-was a result of additions to the in Puerto Rico the traditional sacrificial transforma-
importation of services as the capital investment ex- tion of consumption into investment. The external-
panded rapidly in the growth periodo A constant savings f10w perrnitted investment to mn significantly
dollar breakdown of imports is not available; how- in excess of internal saving.
ever, the current dollar inforrnation shows the serv-
ices component of imports rising from 19 percent
in 1950, lO 24 percent in 1960, and to 32 percent
Domestic Income and Its Disfribntion
in 1970. Economic progress can also be recorded in terrns
Exports increased their shares of GNP far slower of domestic and national income, the respective
than imports. In 1940 exports amounted to 52 per- income counterparts of the GDP and the GNP. These
cent of the real GNP. After World War n, tbe income measures tend to c10sely corroborate, how-
component's share at first fel! to around 40 percent. ever, the trends and shifts in the GDP and the GNP
In the fifties, the share constituted over 50 percent and do not, therefore, add significant inforrnation
of GNP, on the average. After 1967 the export as aggregates to the earlier growth analysis. But what
share fluctuated between 55 percent and 65 percent is of interest are the changes in the distribution of
income. The distribntion can be considered in respect
ofthe GNP.
to the distributive shares received by the faotors
Due to the fact that the export share trailed the of production; by the various sectors of industry;
growth of the import share significantly, the trade and by families or individuals. The first two views
deficit was enlarged. This result is partially the com- are taken in the distributions calculated from the
plement of the external capital inflow that financed domes tic income appearing in table 4.
lhe capital expansion in the economy. Looking at lhese results, there is sorne mild fluc-
A third significant trend found in the graph tuation of distributive shares evident in lhe factor
relates to the expansion of lhe government con- distribution. With the exception of 1965, the com-
sumption component of the GNP. This component position of the income accounted for by factor shares
almost doubled in its importance between 1947 and seems to have been relatively stable.
1977. The process of industrialization of the econ- Despite the general stability of the factor shares,

66
Table 4.-Distribution of Domestic Income in Puerto Rico 1950-77
1950 1955 1960 1965 1970 1975 1977

Millions of dollars

Total ----------~--------------------------­ 583.0 880_2 1,364.1 2,230.1 4,105.3 6,991.8 8,383.8


----------------------------------------------
Percentages of total
Labor _______________________________________ ~_ 58.5 66.0 61.4 70.6 65.8 66.2 61.1
Property __________________________________ 41.5 34.0 38.6 29.4 34.2 33.8 38.9
Sedor:
Agriculture ______________________________________ 25.6 17.5 13.2 8.5 4.4 4.3 3.9
Manufacturing __________________________________ 15.2 17.6 21.2 24.8 23.9 27.8 33.9
Construction and, mining _______________________ 4.8 4.8 6.6 8.1 8.6 5.9 3.5
Transportation and public utilities __________ 8.7 8.0 9.3 9.6 8.5 8.9 8.8
Trade ___________________________________________ 1704 16.8 17.4 18.0 15.7 13.5 13.2
Financial ____________________________________________ 8.9 8.9 10.3 11.3 12.5 10.0 9.1
Services ______________________________________________ 7.3 6.8 9.3 11.2 11.2 10.4 lOA
Governrnent ________________________________~___ 12.1 11.3 12.8 13.8 15.2 19.1 17.2

Source: U.S. Department of Cornmerce; Puerto Rico Planning Board.

the sectoral distribution indicates that considerable question of how broadly Ihe populace participates
restructuring of the economy occurred in the three in receiving the income geneTated by the productive
decades. Puerto Rico's industrialization is c1early ex- efforts of Ihe labor fmce. This question was rus-
pressed in the exchange of the prime position in cussed in chapter I as one of the major issues sur-
the structure between the agricultural and the manu- rounding Ihe Puerto Rican economy. The answer
facturing sectors of the economy. In this transition, to it is extremely important because the rustribution
agricultural income was cut back fivefold in its per- of income on a family or individual basis provides
centage of the total and manufacturing income the consumption and saving potential for the various
doubled its share. The decisive shift of income from income classes in the society. The question whether
the agricultural sector into the manufaoturing sector or not the income rustribution ls too unequal is
was paraIleled to a degree by corresponding shifts closely tied. furlhermore, to the issue whether Puerto
in employment in Ihese sectors. But, as was pointed Rico relies too heavily on the United States for
out earlier, the manufacturing sector never absorbed finance and trade. The external capital inflow comes
aIl the displaced agricultural labm. from both private investors and the Federal Gov-
The income share of the government sector gained ermnent; from Ihe lalter through its transfer pay-
extensively in importance over the years, mirroring ments. Federal transfer payments have grown re-
the growlh of Ihe GNP component that was previ- markably in recent years, as Ihe next section will
ously noted. The service sector also experienced explain.
notable growth in its position as an income generator; Despite the faot that the distribution of income
and the share of income received by construction is of essential importance to economies, not only
and mining swelIed in the sixties, as the investment because of the direct and indirect consequences,
pace quickened, bnt subsided after 1970, when seri- both economic and political, bul as a foundation for
ous unemployment pervaded the industry. The shares economic policy decisions, information oh distribu-
going to trade and finance, it is evident, underwent tions of income is quite limited. The problem is Ihat
very similar shifts. The transportation and utilities population censuses are usuaIly taken infrequently
sector, on the other hand, experienced a more stable and, besides, income information is extremely difli-
performance of its relative income. cult to obtain. Another reason for the dearth of in-
forrnation is Ihat adjusting the gros s income distribu-
Disfribution of Income and Population tion for taxes, transfers payrnents, and income in kind
is diflicult; yet, income adjusted for these flows is
Viewing the distribution of income by diSllributive the final indicator needed for equity considerations.
factor and sectoral shares aids in understanding the The scarcity of data and analysis of income de-
extent of restructuring that went on in the transition scribed aboye holds for Puerto Rico as much as
of Puerto Rico from an agricultural production sys- other areas. However, two recent studies of the
tem to an industrialized economy. The income dis- beforetax income distribution by families and indi-
tribution considered from these two viewpoints, viduals are available. Both are private investigations.
however, emphasizes Ihe manner in which the income The one study 5 derived the distribution directly from
is generated in the economy. That knowledge is
fundamental to any analysis of an economy, of ~ R M. Maldonado, "The Economic Costs and Benefits 01 Puerto
Rico Political Alternatives," The Southern Economic JournaJ, Vol. 41,
course. Of even greater concern, however, is the No. 2, October 1974.

67
tbe U.S. Census data. The second analysis 6 applied The plight of the poorer families that is implied
an inpnt-output and occupational structure model to by these distributions can be made c1earer when we
the census data and thereby deve10ped distributions consider that 10 percent of the families in 1969
of inceme by individuals for several years between translated into 56~500 families, while in 1959 10
1953 and 1963. Only the results of the first investi- percent was equivalent to 44,500 families.
gation are discussed here. They are tabnlated and The distributions plotted may somewhat overstate
plotted in the accompanying table and figure. The the concentration because income in kind has not
income used in the analysis does not inc1ude income been inc1uded. Usually the lowest income groups
inkind. would receive more of tbeir income in this form than
The two curves plotted in tbe diagram (figure 4), families found in other income strata. Neverthe1ess,
if the overstatement was of the same degree in each
Figure 4 of the decennial years, the concavity of the curves
Distribution of I"come in Puerto Rico, 1959 and 1969 wonld not have been affected. Since the economy
100
became more urbanized between the two dates, in-
90 comé in kind would be expected to have been slightly
00
80 more important in 1959 than at the later date.
-x
c. • 70
0<::-° A further consideration is needed in assessing the
e~ 60 $.~ income concentration. The progressivity of the Puerto
0."
••
.~

ro 50 <V'"
§
Rican tax system-if it is realistic and not merely
••
.2:
"SE
EO
40 ~o
;,.0ú' superficial-mus! be considered, along with transfer
payments, if tbe distribution of income is to be in-

ü"a 30 ~
7do terpreted in tbe sense of buying power attributable
20 rr
• to the populace. However, information about the
10
Perfect " effective tax rate by income levels is not readily
0
0 10 20 30 40 50 60 70 80 90 100 available. (This is an area of research that should be
Cumulative Percent of Families given added attention.) Regardless of tbe considera-
tions that should be extended to tbe two distributions
that have been cited here, tbe degree of cencentration
Incomo In H59 o! F.mm •• In Puerto RTce Incomo in 1969 01 Familie. in Puerto Rico

OW"'''',rr.J"os p"c"",
of money income can be c1early seen.
D;~: ~.::'::'
P.,Con1
,n;m Lowe>t 'o
orTo~L
"~~,' ~,:': N~:,~;':f
H'Q'<S'ln,om<

To'" $1,0' 0.9,".154 10000 <45,352


Hgh"tloo""e

To~1 $2,516.631,038 ,ó',7ó'


Progressive taxation and the use of transfer pay-
0" gg9 '''""'0' 0<" 999,,,,,,,", 7.701,510
" 56,4'" ments are devices of policy than can and have been
"."
44,535
'0:0 '909 ,,,,en' ".90M.S 44,535 10"' '9 99 "".." 35,106.\74 58,475
20 'o 29.99 '" ,en' 23.955.""'
'" 44.53. c<o'
'" lo '",9" 'oc
pe,,,n'
69.924.445
,,'
'6,4" used in attempting to shift an undesirable inceme
SO 'oS9990"'0"' 04,073.6"5
"."S JO ",3999
.0 'O,"",,,,,",
, 1 '.'lJ~.29; 56.47"
40tQ4999
'o
w<ent
5999 oe< <"'"
48<",620

."
<4.535 Lo "2.293.'37
107.700.903
56,475
"6,475
distribution. In the case of Puerto Rico, the source of
."
SO 64,90','2. '4.535 501059990"""'
60""99'"'0'"'
7O"""S '" OS"'
S6,'95,321
." U .• Jo
<4,,3S
60 1o e~.9 pe<
70'o,g~9~"'"t
cen' "25,.70,740
:l.Q.S',.'"' 13 $O
56,470
56,47, transfer payments is primarily the Federal Govern-
aO'oa •• 9 '<:<""0'
117,SSS,'S,
165.305.276 "" U,""~ BO,""""",.. o,"' 4""9.,669 56,475

H"h,,' '"''''0001 453.700.037 «,535 H,_nesL '" ",ce", 951,41,,""" mento The question is whether these payments, and
particu1arly in their recent volume, are sustainable in
the long runo An alternative policy which can impact
which are known as Lorenz Curves, depict a slight the distribution of income is a policy of promotion
movement of the distribution towards a situation of of employment in the high productivity sectors of the
more income equality between the decennial years. 7 economy, or the sectors that might become high
The data show that in 1969 gross income in Puerto productivity areas in tbe future. If a larger portion
Rice was quite concentrated in respect to family of the labor force in the lower income echelons can
population. The poorer half of the families received be absorbed in such industries, the distribution of
only 15 percent of tbe inceme, while the top 20 income will become more equitable through betler
percent obtained 55 percent of the income. The re- and more jobs. Of course, job efforts in general
sults also show that tbe shift between 1959 and 1969
was not very significant-although somewhat favor-
able, except in the case of the highest and lowest
should assist in providing some correction of tbe
inequality. I
The labor force, however, must be prepared to
deciles. The latter two groups, on the surface at least, take on the higher skilled jobs if the job route to
were put at a greater disadvantage over the decade. income redistribution is taken. This means, generally,
6 R. Weisskoff, Income Distribution and Export Production in
that vocational education of the populace, particu-
Puerto Rico, Center Paper No. 245, Yale University Economic Growth larly the younger labor force participants, needs
Center, 1976.
7 The 45"·line in the p]ot represents the line of perfeet ineome
special activation to prepare people for the areas in
equality and the base and right side of the graph, forming the lower which labor demand seems to have strong enough
right-angle comer of the diagram, represent a Une of perfeet ineome
inequality, potential in the future to warrant tbe training effort.

68
J
The tax policies of subsidization in the high produc- Figure 5
tivity areas already afford stimulus to hiring that Total and Federal Transfer Payments as Percentages
tends to improve the distribution of income in the of Personal Income in Puerto Rico, 1950-77
sense of broadening it. Personal lncome
Some may argue that the distribution of income in $8182.1
MiUions of Dollars
puerto Rico should be even more concentrated so
that more internal saving can be generated to finance
the investment pace of the island economy. There is
Total
Transfers
{~} Transfers
Federal

obviously some relationship between the distriburtion lS;~

of income and the rate of saving in an economy. The 15%


relationship would appear to be a complex one in
puerto Rico, where saving is negative overall. How-
ever, there appears to be evidence that some Puerto
Ricans have placed their savings in foreign assets
rather than domestico How important these funds
would be to domestic investment is unknown.
The questions raised in the foregone discussion are
empirical to some degree, but they are, importantly,
also normative. Analysis of the relationships and the
policy impacts mentioned seems especialIy warranted $1373.6
in devising policy for Puer.to Rico. The analysis in 60/0: '"
this report has merely stressed the importance of the
income distribution issue. The more fundamental 8%~1$653;'D~
4% UJ
analysis must be left to more thorough future exam-
inations of the issue. 1950 1960 1970 1975 1977

So"rc.: u.s. Dop'. 01 Camme'eo; Puerto Rico Planning B""rd.

Transfer Payments food stamps is üften eited as the source of some dis-
The distribution of income can be shifted by im- ruption of the supply of labor, since the opportunity
posing taxes on certain groups and making transfer cüst of supplying labor is greatly altered by the faod
payments which redistribute the income to groups stamp provisions. How significant this factor is in
which are considered needful oí assistance. Transfer regard to labor force participation is a matter of
payments have been an income source in Puerto Rico empirical investigation which is beyond the Iimits of
for many years. Before World War II they constituted analysis prüvided in this study. The Puerto Rican
only 3 percent of personal income. But by 1950 they Department üf Social Services has attempted an in-
were 12 percent, and by 1970 they accounted for 15 vestigation üf the matter, but additional effürts
percent. After being stepped up to buoy the economy appear needed.
in recession, they had grown to 28 percent in 1977. Federal transfer payments have been an extremely
Transfer payments originate with the Common- important souree of external capital inflow for Puerto
wealth and municipal governments, the Federal Gov- Rico, particularIy in the very recent years. In 1960,
ernment, public enterprises, business, and nonresi- Federal transfers amounted to 38 pereent of the net
dents. Although the Federal Government had been external capital inflow. Between 1970 and 1972 they
the main contributor of the transfer payments re- varied arüund 31 percent. The percentage rose to 45
ceived by Puerto Ricans over a number of years, as pereent in 1974; to 86 pereent in 1976; and finally
the data in figure 5 show, it was after 1970 that the to 108 percent in 1977.
Federal transfer flow acce1erated rapidly. The great The preceding brief accounting of lbe rise üf Fed-
rise was associated with payments to the unemployed
eral transfer payments to Puerto Rico gives a notion
and for job programs. lt was attributable also to the
introduction of Federal food stamps, which became of the significant role they play and have played in
the primary support for many families. When the the development of the eeonomy and the maintenance
foad stamp program eommenced in 1975, the stamps of spending. They further reflect the reliance of the
amounted to $387.5 million in value, or about a economy on the mainland, or more precisely, on the
lbird of the total Federal transfer payments going to Federal Government. Whether this relationship can
Puerto Rico. Two years later, they were valued at eontinue in líght of the polítical potential is an im-
$801.1 million, or 43 pereent of total Federal transfer portant corollary to the issue of whether the economic
payments. The rapid upswing in the distribution of reliance ün the United States is too extensive.

69
Because of the massive influx of Federal transfers, Figure 6
there has been líttle pressure on the Government of labor Force and Employrnent in Puerto Rico, 1951-77
Puerto Rico to take on the responsibílíty of trans- 1000,-------------------,
ferring income internaIly. The influx of transfer pay-
ments has, as in the case of consumptíon, aIlowed a
significant portion of the Puerto Rican investments 900

to be financed from maínland saving by being chan-


neled through the Federal Government's taxing pow-
ers. How the configuration of transfers wíII, and 800

should be changed, is an issue cIosely intertwined


wíth that of increasing future economÍC growth, the "e
'C

employment issue, and the issue regarding the rus- g¡


o
700
o
tribution of income. Any policy implications pertam- ~
f-
ing to transfer payments must be considered wíthin
lhe context of all four issues.

EMPLOYMENT AND LABOR 500


MARKETS
High unemployment has always been a problem in
Puerto Rico but the rate has been especiaIly severe
in the last 4 years. The unemployment rate climbed Soum.: PuertO RIco Depl 01 Labor and Human Ileso",c ••

steadíly from íts 1973 leve! just below 12 percent to


reach a high of 23 percent in May 1977. However, caused the unemployment rate to drop to the 10- to
since lhen the rate has graduaIly decHned to 16 per- ll-percent range by lhe early 1970's.
cent in Apríl 1979. Perhaps no other statistic indi-
cates so cIearly the weakness of lhe Puerto Rican Employment dropped sharply in early 1975, and
economy, a weakness which resulted in part from lhe the unemployment rate rose dramatícally. As it rose,
receg¡;ion in the Uníted States, with whose economy labor force particípatíon rates were falIíng, indieating
Puerto Rico is so cIosely Iinked. that the economy's weakness was even more severe
lhan what was implied by the unemployment rateo
The historie inabílíty of the Puerto Rícan economy
As unemployment hit 23 percent in 1977, participa-
to provide enough employment for Íts growing popu-
tion in the labor force feIl to an historie low of about
lation led the Government to formulate policies in
42 percent. 8 The rate was well below the 62-percent
the late 1940's to stimulate investment in the private
rate in the United States in that year. The Puerto
sector. The policy effort worked primaríly through
Rícan rate incIudes 14- to 15-year-olds, who have
granting broad tax exemptions for businesses estab-
Iíshed by local or outside companies and was able very low participation rates. One eountervaílíng fac-
tor enlargíng Puerto Rico's labor force and, therefore,
to stimulate Puerto RÍeo's impressive employment
growth in manufacturing. However, total employment
exacerbating unemployment rates may be the report-
ed return migration to the island.
I
decIined in that decade, as manufacturing growlh was
not strong enough to offset weakness in sueh seetors In addítion to unemployment, underemployment
as agriculture (see figure 6). Despíte the drop in may be a problem in Puerto Rico. Employed workers
employment, the unemployment rate foIlowed a who would frequently Iíke to work longer hours have
downward trend because the labor force declined. traditionaIly been concentrated in agriculture. This
This unusual development was due primarily to large effort which led to a decline in underemployment
emigration from Puerto Rico, which averaged nearly during lhe 1960's as Puerto Rico industrialized. Be-
50,000 persons (or about 2 percent of total popula- cause underemployment, as an indicator of under-
tion) per year from 1952 to 1959. Declining labor utilization of labor resources, is generaIly taken to
force participation by the remaining population, move in tandem with the nnemployment rate, it is
whích feIl from 55 percent in 1950 to 45 percent by therefore believed that underemployment has risen
1960, also helped depress lhe size of the labor force. in the last few years.
In the 1960's and early 1970's, manufaeturing Federal Government employment programs have
employment eontinued to grow rapidly along wíth helped to cushion the blow of recession in Puerto
total employment. The labor force grew more nor-
mally, as immigration slowed and participatíon rates 8 Differences in computation of U.S. and Puerto Rícan labor force
statistics make cxact comparisons impossible, but sllch general COIDw
leveled off at about 45 pereent. Employment gams parisons can be useful.

70
Rico. J obs and training authorized under the Com- Figure 7
prehensive Employment and Training Act of 1974 Unemployment Rate in Puerto Rico, 1951-77
(CETA) have been the main vehicle for direct em- (Percent of Labor Force 14 Years and Older)

ployment aid. Looking at the three major parts of 20,-----------------------------------""


~.

CETA, TitIe I offers c1assroom and on-the-job train-


¡
i
ing; TitIe JI provides support for the Commonwealth ¡
to hire public service employees, and Title VI is a
special recession measure which supports emergency .'.',, .....ro.\ i
public employment. Under these three Titles, 40,000 15 - \
~
:¡¡
to 60,000 Puerto Ricans have been trained or em- " l ",
. . - ..../ "\ ,i•
ployed in the past 3 years. Jobs thus provided con- ~
,r""\\ ....., ,. .. w ..
,..
stituted 5 percent of total employment in 1975, and e
\ ..,..;/ '\ /'"
\ .....-'"l
8 percent of employment in 1976 and 1977. Without ~
m 10
these programs, government employment would not n.
have added the strength it did to employrnent growth
in the past 3 years, and the overall unemployment
rate would probably have risen much higher.
51-
Unemployment Among Demograpbic
Groups
To get a clearer picture of Puerto Rican labor
markets, one must look beyond these aggregate trends
to see how various groups fare. The younger the Fiscal Years
Source: Puerto Aico Oept 01 Laborand Human Relatjc~.

worker, for instance, the higher is the probability of


unemployment. This holds true in Puerto Rico as female workers resulting from the sectoral pattern of
weIl as in the United States. The overall unemploy- recent Puerto Rican economic growth.
ment rate in the last fiscal year was 20 percent, but Another explanation for relatively low unemploy-
that for 16- to 19-year olds was 48 percent, and the ment rates among women may be their labor force
rate for 20- to 24-year olds was 33 percent. The lack participation rate, which stands at 26 percent com-
of job prospects for 16- to 19-year olds is further pared with 59 percent for males (a gap about equal
reflected in their labor force participation rates, which to the difference between male and female rates in
are only 27 percent for males and 12 percent for the United States). The low female participation rate
females, aIthough the rate for 20- to 24-year olds may reflect the withdrawal from the labor force of
are nearly three times as high. In comparison, U.S. 10w-skilIed or agricultural workers who have become
participation rates for workers between the ages of discouraged in their job searches; the women remain-
16 and 19 were abaut 56 percent last year, although ing in the labor force would then be those best
this higher rate is partly attributable to the greater equipped to find jobs and therefare experience an
availability of part-time work to teenagers on the unemployment rate below that of men (see fignre 8).
mainland. Low participation rates reflect pessimism
about job prospects as well as the effect of school
enrollment among teenagers. Employment By Sector
Unemployment rates for men and women in Puerto The preceding analysis has examined Puerto Rico's
Rico show a pattern surprisingly clifferent from that employment and unemployment developments at an
in the United States, the female rate is lower. Last aggregate leve!. The present section analyzes employ-
year it was 15 percent, while that for males was 22.5 ment by sector in arder to evaluate sectoral contribu-
percent (see figure 7). A similar comparison holds tions in absorbing available labor force (see figure 9).
true within each age group. One reasan for this is the The parallel analysis of unemployment by sectors
much higher unemployment rate (28 percent) in pre- cannot be made, however, since unempJoyment data
dominantIy male blue-collar jobs than exists in serv- are not availabJe on such a basis.
ices and white-collar occupations (15 and 9 percent The largest chauge of sectoral employment in the
respectively). past two decades has been the decline of the agricul-
The exceptionally high unemployment rate among tural sector; the sector provided· employment for 23
construction workers would itseIf add significantly to percent of Puerto Rican workers in 1960 but for only
the rate of maje unemployment. Another factor has 6 percent in 1977. In its place, manufacturing em-
been the relatively stronger growth in demand for ployment has grown along with services and trade

71
Figure 8 the government sector in lhe long run is more de-
labor Force Participation Rates lor Men pendent on a healthy private economy than vice
and Women in Puerto Rico, 1960-77 versa. Some of the growth in government empl?y-
(Ages 14 and Over)
ment during recession years reflects the extenslOn
80 of Commonwealth taxing and borrowing activities,
which were stretched nearly to lhe limito
------
_••
70~_ ____
.. _...... Males

.........
The increase in services and trade employment
601- in the 1970's reflects the disproportionate growth
50
------ of consumption in most recent years. Since most

-
e
<D
~
4Df-
services are produced locally while many of the
goods consumed are imported, lhe service sector has
shown a relatively large output increase. Inasmuch
<D
Cl..
30f- Females as demand for services comes mainly fram middle-
and high-income consumers; employment growth in
20 goods-producting industries, especially since lhese
inelude some of the highest-wage industries; is neces-
10
sary for lhe services and trade sector to grow.
I I
O Services and trade activities generally provide
1960 1965 1970 1975
Calendar Years
fewer exports lhan manufacturing. Certain types of
Sou,ca: Puerto Rico Dept of Labor and Human ResOUfCes
services are exported, including banking and tourism
services. Growlh in such sectors, for which Puerto
occupations, grawth of which accompanied the man- Rico's location is advantageous, provides a strength
ufacturing boom of the 1960's. Government employ- which Puerto Rico might exploit to the fulles!. The
ment has also risen substantially in lhis periodo The demand for services and trade in the industrialized
construction industry showed healthy galns through world generally is expected to continue to rise.
1972, but then dec1ined to much lower levels. How-
ever, by mid-1978 an upturn was under way. The weakest sector in this decade has been the
construction industry. After riding the wave of eco-
It should be noted that not all of the long-term nomic expansion in the 1960's, construction employ-
trends will necessarily continue. The agricultural sec-
tor's long decline, for example, has seemingly ended. Figure 9
The transformation of Puerto Rico into an industrial Employment by Sector in Puerto Rico, 1964-77
economy and the failure of the farming sector to keep 300.-------------------------------------,
up with technological innovation that was occurring
in olher economies meant that greater job oppor-
tunities developed in urban areas than in rural areas. Services and Tfade

The differential in job possibilities caused many 250


workers to migrate from the rural areas to the elties.
The two sectors, however, which displayed steady
growth in the 1960's--government and services and
200
trade-have also remained fairly strong in the 1970's. Public Administration
Employment in government has risen 54 percent and Services

since 1970, and that in services and trade has grown ~


"
'O
e
13 percent, compared with an 8-percent growlh of ro
~ 150
total employmen!. Both of these sectors depend on a o
~

healthy overall economy for their long-term strength. f-

Government and public enterprise employment has


grown as a natural result of the expanding scope of 100
government in Puerto Rico, as well as the Federal
CETA employment programs which direct1y subsi-
dize government employment. The more general fi-
50
nancial support which is received from the Federal
Government, in addition to tax revenues generated
by local economic growth, constitute the two major
sources of support for government employment. Gov-
ernment wages feed into the private economy as lhey
are spent, supporting private employment, but clearly

I
Source: U.S. Dept 01 Commerce; P.uerto Rico Economic Developmenl Admlnislration

72
ment plurnmeted 46 percent between 1974 and 1977. have accounted essentially for all of the manufactur-
Substantial gains in dollars spent on construction ing employment growth after 1960.
between 1970 and 1975 appear to contradict tbis, The employment growth tapered off significantly
but the much higher than average price iuflatiou in after 1969, and between 1974 and 1976 the level of
this sector more than erased those gains. In real employment in manufacturing felI more than in any
terros, construction activity in 1975 (tbe "peak" year) sector except construction. In 1977 employment
was actually lówer than in 1970, and larger decreases stood slightly below ,¡he 1974 peak level. While total
have occurred since 1975. manufacturing employment has fluctuated close to
Among three major categories of construction, the same level in tbe past 5 years, there has been a
housing suflered the largest declines from 1970 to sbift in the industrial composition of that employ-
1975. Real spending on housingconstructiondropped ment, a shift which began a decade ago. Since 1969,
36 percent, despite large doses of Federal mortgage employment in apparel, textiles, and leather goods
subsidy and public housing prograrns. Escalation of manufacturing has fallen off, that in the food industry
housing prices has outstripped the increases in family has risen slightly, and jobs in metal fabrication, ma-
incomes in Puerto Rico in recent years. This factor chinery, and chemicals have increased markedly. The
and suspension of Federal 235 and 236 subsidy pro- effect of these different palterns onthe distribution
grams, resulted in construotion of fewer new private of manufacturing employment among industries ap-
housing units each year since 1973 and 1976, but pears in table 5.
by 1978 some revival had occurred. Increased public
Table 5.-Distribution of Manufactnring Employment
housing construction has made up for part of these in Puerto Rico (fiscal year)
private declines.
[In percentages]
The largest construction category is industrial and
1969 1977
commercial buildings, which has been the most vola-
Food, apparel, and textiles _____ .__________________ 50.5 45.2
tile from year to year. The peak of nominal dollar TobaceD, leather and light manufacturing _______.. _ 19.3 12.0
activity of this kind was reached in 1975, but in real Metals, machinery and instruments ________________ 14.7 24,0
Chemicals and petroleum products ___________ ~_ 5.1 10.6
terms this only equaled the level of construction in Other o •• ______________ • • _______________ . , ___ " __________________ "____________ 10.4 8.2
1970. Ruge declines have occurred since 1975 in
this building sector. Public construction is tbe only
major component of the industry which showed small The shift of new industry, investment, and employ-
gains in real activity between'1970 and 1975, fi- ment toward more capital-intensive sectors in manu-
facturing has been encouraged by U.S. and Puerto
nanced by the expansion of public indebtedness and
Rican tax exemptions on corporate profits earned in
grants from tbe Federal Government for highway,
Puerto Rico. Since the rate of return to capital was
water and sewer, and other projects. Public construc-
increased by such tax exemptions, capital was at-
tion in the near future will probably be largely fi-
tracted to the island and its cost to investors declined.
nanced by a Federal counter-cyclical public works
Thus did oil refining, chemical, drug, and machinery
grant of $284 million received in 1977, under the
mannfacturing cO'me to dominate the growth O'f
local public works programo The amount exceeds the
Puerto Rican manufacturing and exports, although
total public construction outlays made in Puerto Rico
in 1976. food and cIothing firros stiII employ a very large
proportion of workers. Other causes of this shift are
The last major sector of the economy is to ex- discussed below.
amine manufacturing, which in most analyses of eco- An important implication O'f the concentration of
nomic development is treated as a key to economic growth in capital-intensive sectors is that less employ-
growth. Manufacturing jobs are generally the most ment is generated froro a given rate of growth in
productive and highest paying ones in the economy; output or investment. If it is a Puerto Rican goal to
they involve the most technical training and institu- raise employment by a certain amount, more capital
tional change as part of the modernization process. and output wiII have to be generated to achieve the
Service, trade, government, and construction employ- goal through expansion in chemicals than through
ment can be stimulated by a growing manufacturing expansion in appare!. The lalter course would also
s~ctor. The manufacturing sector had perforroed par-
result in more low-wage jobs.
ttcularIy well in Puerto Rico until the earIy 1970's.
Tremendous growth in manufacturing employment Structural Causes of Unemployment
until then resulted from the Government's industrial
promotion activities, in which generous business tax The serious unemployment problem facing PuertO'
exemptions were the key element. Factories support- Rico results both from labor demand and supply
ed by this program and administered by Puerto Rico's factors. The labor force has risen 'an average of 2.7
Economic Development Administration (Fomento), percent per year in this decade, according to official

73
figures, even though adult labor force participation cheap foreign oil during the era when its entry into
rates have fallen steadily. The comparable rates for the U.S. market was restricted, it now pays OPEe
the 1950's and 1960's were: 0.8 percent and 2.0 prices. Since U.S. oil prices have jumped less than
percent. Since sorne job seekers become discouraged international prices, Puerto Rico has more ¡han lost
and drop out of the labor force in the face of high Íts rost advantage. Many U.S. producers also have
unemployment rates, the declining participation rate the option oí substituting other energy sources for
of the 1970's is a sign of underestimated unemploy- oil, while Puerto Ricans use onlv petroleum under
ment. present technology. Since Puerto Rico is al !he merey
Insufficient labor demand is the more traditional of OPEe price and supply decisions, new energy-
problem which policymakers try to address. Puerto intensive investment may well be slowed or stopped
Rico's economy recently has followed the business by the world oil situation.
cyde of the United States; the deep U.S. recession The minimum wage rate hikes which Puerto Rico
of 1974-75 was a major cause of Puerto Rieo's down- has already experienced and will continue to experi-
turn in 1975. The unemployment which resulted was ence in the next 2 years may be significant for ¡he
cyclical, and as income and employment have re- future industrial composition on the island. In the
covered on the mainland, the Puerto Rican economy decade prior to the mid-1960's, in addition to cheap
benefited from increases in U.S. imports from and oil another of Puerto Rico's chief atlractions was its
investment in Puerto Rico. low wage rates relative to the United States. This
It is doubtful, however, that cyclical recovery faotor brought labor-intensive industries to the island
alone will enable Puerto Rico's unemployment rate and provided increasing employment opportunities.
to return to the approximately 10-percent rate which In the last decade, however, most new manufacturing
prevailed 8 years ago. In the last several years, struc- jobs were created in industries that were generally
tural changes have occurred at the same time as the more capital intensive, which could absorb larger
cyclical downturn, causing a different kind of unem- wage rate increases, but in which employment gen-
ployment which is generally termed "struotural unem- eration was relatively limited. Although manufactur-
ployment." ing wage rates in Puerto Rico rose slightlv less than
Basic economic shifts which cause "structural un- in the United States in the past decade, !he applica-
employment" can be the appearance of additional tion of the U.S. minimum waRe rate law (FLSA),
hard-to-employ groups in the labor force, regional expanding emp]oyee fringe benefits, and the increased
shifts in economic activity on the island, significant number of paid holidays have raised labor costs in
changes in demand or supply of important goods, or !he island. Because of these factors labor-intensive
changes in the intemational economic arena. Such industries may find location there less atlractive. The
basic changes tend to have long-term consequences, increased number of paid holidays, for example, is
such as unemployment which does not disappear with estimated to have led to a work-year in 1976 about
a general cyclical recovery. 10 percent shorter on the island than the U.S. average
As industrialization proceeded, job growth became and an even greater shortfall compared with sorne of
concentrated in urbanareas and in factories, govem- those industries among major foreign competitors.
ment, and service enterprises while farm and home In the case of the apparel sector which is such a
needlework workers bore a disproportionate share of large employer in Puerto Rican manufacturing, labor
Puerto Rico's unemployment increases. Several dif- cost increases should be more fully compared with
ferent structural changes have occurred more recent- competing Asian and La.tin American countries. For
ly, the two most important being the jump in world example, the average hourly wage rate in Puerto
oil prices which followed the 1973 OPEe oil em- Rico's apparel industry rose 19 percent between
bargo, and the shift toward capital-intensive prodnc- 197 4 and 1976,9 while hourly labor compensation
tion. Both aspects affect Puerto Rico's intemational including fringes rose 20 percent in Hong Kong, 26
competitive position, which partially determines the percent in Taiwan, and 41 percent in Korea. Thus,
strength of both domestic and foreign demand for despite the apparent higher level of the wage rate
manufactured goods, agricultural products, and serv- in Puerto Rico, its rate of increase appears to have
ices. been smaller than those of sorne of its competitors,
The move toward more capital-intensive manufac- allowing that the percentage change in labor compen-
turing has to sorne extent brought with it a greater sation c10sely corroborates that of the wage rateo The
dependence on energy, specifically oil, as a produc- scheduled increases in minimum wage rates of about
tive input. In fact, oil-intensive production was es- 11 percent per year through 1981 may, however,
pecially attracted to Puerto Rico because of its for- change this relationship.
merly cheap imported oil. Costs have skyrocketed in 1> Between 1974 and 1977 the increase was 28 !1ercent in the Puerto
the past 5 years; the complete dependence of Puerto Rican appare} industry. Although the comparison is not entirely
accurate, labor comrensation is used in the case of foreign producers
Rico on imported oil means that, whereas it bought in the discussion because hourIy wage rate data were not available.

74
In recent years, more and more workers in Puerto position would be damaged or not as a result of such
Rico have been covered by minimum wage rates and wage rate inereases will depend on fue re1ative move-
these rates have been brought closer and closer to ment in these key variables.
the U.S. minimum. By 1976, 97 percent of non- In addition to the minimum wage rate and energy
supervisory manufacturing workers and 88 percent cost changes, other long-run changes may lessen
of services and trades employees were covered by a Puerto Rico's investment attraetiveness for certain
minimum wage. N early all will be covered by 198I. industries. The advantages Puerto Rico has as a re-
Each industry in Puerto Rico has a difIerent mini- sult of its association wilh the United States, such as
mum wage level, but 63 percent of covered workers safety for American investments, and exemption from
were at orabove the $2.30 minimum in 1977, and tariffs on shipments to the United States, may de-
another 29 percent had minimums of ,at least $2.00. crease as investors become more accustomed to op-
Indnstries which now have lower minimums than erating in foceign countrie~, and as worldwide tariff
$2.30 will be subject to bigger increases in the next levels fallo An additional problem is the faet lhat tax
3 years, bringing nearly all sectors up to parity with holidays whieh have been the key factor in Puerto
the mainland by 198I. Rico's aUractiveness to investors are inereasingiy
Since average wage rates in Puerto Rican indus- used by eompeting econornies.
tries are clustered much closer to the $2.30 per hour In sum, these structural faetors make Puerto Rico's
minimum wage rate than they are in the United employment outlook unclear. As was mentioned
States, average wage rates in all sectors are likely to earlier, employment in agriculture dropped steadily
be more affected by statutory changes in minimum as a result of the inability of Puerto Rican farmers
wage rate than on the mainland. For example, the to keep up with lhe technological progress experi-
average hourly wage rate in apparel in 1976 was enced in other economies. Labor-intensive manufac-
only 4 cents aboye the minimum ($2.30 per hour) turing may suffer somewhat from wage rate increases.
and wonld by necessity have lo rise by at least the The competitive position relative to the mainland of
prescribed minimum in the next 3 years. lO energy-intensive industries has been damaged by
In order to glean from wage information some world oil price increases.
notion of the competitiveness of Puerto Rican manu-
Construction employment gains may be limited by
factures vis-a-vis mainland and foreign products,
weakness in the housing market. Slower expansion
unit labor costs for various industries and economies
of publie infrastructure investment will probably also
would be extremely helpful. The data foc such a
limit construction growlh, although the 1977 Federal
comparison, however, are either nonexistent or not
Local Public Works Capital Development and In-
easily available. Labor productivities in various econ-
vestment (LPW) grants llave contributed to the ron-
omies, which are needed ingredients for the compari-
struction recovery. Growth of government employ-
son, cannot be determined. A further complication
ment, other lhan that snpported by Federal programs,
to valid comparison is the frequency of occurrence
may slow in response to the widely perceived need
of noncomparable output mixes within industries of
for fiscal austerity.
competing economies.
A1though intereconomy comparisons are not pos- A bright spot may be lhe long-term rise in world
sible, the available Puerto Rican data can provide demand for services such as tourism and for island
some notion of the possible influences of increases in exports. Its proximity to Latin Ameriea could help
minimum wage mtes or in the wage rate structure its exports of machinery and instruments as that part
that might parallel such increases. Annual advances of the world continues to industrialize. There may
in labor productivity in manufacturing have averaged also be potential in development of import-substitu-
about 6 percent between 1965 and 1977. During the tion industries, especially since food and clothing
same period lhe average hourly wage rate increased imports constitute a substantial fraetion of the total.
approximately 7 percent, implying a small rise in
unit labor cost. Unless labor productivity can advance
more rapidly than it has, an increase in overall wage
INFLATION IN PUERTO RICO
structure of roughly 11 percent-the annual rate of
Inflation in lhe presence of distressing levels of
inerease planned for minimum wage rateiY-if it did
unemployment has been the most perplexing eco-
oeeur, would cause unit labor rosl increases in manu-
nornic problem facing lhe industrialized world in the
facturing to be greater than those experienced in
postwar years. As a tandem economy of the U.S.
recent years." Whether Puerto Rico's competitive mainland, Puerto Rico was certainly not immune to
10 The mmimum wage tate will increase bv year1y increments of the problem. One side of the problem, the dimensions
25 or 30 cents depending on the leve! of the minimum wage rate in
1977. of the unemployment on the island, has already been
11 The minimum wage rate will increase by yearlv increments of 25
or 30 cents until 1981 depending on the leve! of the mínimum wage
reviewed. The inflation side of the problem, as it
rate in 1977. relates to Puerto Rico, is diseussed in this section.

75
The analysis (1) compares the Puerto Rican inflation ized economies, particularly where competition is
to that of the U.S. mainland; (2) examines the nature greatly modified, or even nonexistent, due to the high
of the inflation in Puerto Rico in respoot to cost-push concentration and excessive market power of firms
and demand-pull influences; and (3) explores the and the collective bargaining on wages and work
sectoral sourCeS of the aggregate inflation. conditions by organized labor. However, even in the
lesser developed economies, where market imperfect-
Inflation in the Two Economies tions frequently prevail, tbis type of inflation is
evident.
The rate of inflation in Puerto Rico in the postwar
Unfortunately, neither of the two fundamental in-
years was virtually the same as in the United States.
flation types described aboye is dirootly observable.
The rate averaged about 3.5 percent per year in the
Furthermore, their detection is complicated by the
two economies over the span of the three dooades.
fact that most often tbey interact, demand-pull pri-
The relevant data, displayed in table 6 show the
marily reinforcing tbe cost-push inflation. However,
the design of appropriate policy responses necessi-
Table 6.-Gross Domestic Product Inflation Rates tates that the causal nature of the inflationary pres-
Puerto Rico and the United States, 1940-77'
sure be understood. Nevertheless, in the case of
[In percentages] Puerto Rico, knowledge of the nature of the inflation
Anoua1 average tate of inflation is only partially helpfnl to solving the problem, be-
cause the tools of policy available to the government
Periad Puerto Rico United States
to counteract demand-pull inflation are quite limited.
1947'-;;3 2.36 2.31 Monetary policy, for instance, is almost prec1uded,
1963-73 4.00 3,98
1973-77 6.66 7.41 except for certain elements of credit control, given
1947-77 3.47 3.53 that the essential policy is determined for the island
1. Average annua! compound tates of change calcuIated using
by the U.S. monetary authority. The available fiscal
terminal dates desigoated from impIicit price deflator for GDP. measures, on the other band, are constricted by a
lack of policy channels and by the limited flexibility
pattern of development. The inflation rate was slight- in government expenditure patterns. While the Com-
Iy faster in the United States than in Puerto Rico, it monwealth may retain a limited capacity to deal with
can be noted, in the very recent years; but, on the demand-pull inflation, tbere may be likewise very
whole, the differences in the calculated average rates little Puerto Ricans can do to offset the major portion
are trivial. The continued acceleration of the infla- of cost-push inflation. Tbis latter pressure may be
tion throughout the period is evident in each of the more significant than demand-pull inflation for Puerto
economies. Rico, booause of the higb import content of tbe pro-
duction inputs and consumption goods in the ooon-
Nature of the Inflation omy. Tbus, price increases would largely reflect
external inflation conditions and would appear as an
Although taxonomies of inflation frequently list internal cost-pusb to Puerto Rico. Under these cir-
numerous kinds of inflation, only two basic types cumstances, the anti-inflation policy of the govern-
seem to emerge from inflation analysis. The more ment is reduced essentially to controlling wage in-
traditional of the two is demand-pull inflation. This creases.
type results from a distinct increase in the economy's
aggregate demand for goods and services against a Inflation Indexes
given level of production or supply. The effect is
particularly evident when the economy is at capacity To analyze the nature of tbe Puerto Rican postwar
production or at levels near capacity. However, not inflation, the study used two indexes, or indicators.
all of the demand-pull effect gets directed toward These indicators are superimposed on a profile of
price increases. Some of it is released in the form of the Puerto Rican inflation rate in figure 10. Tbe in-
an increased order backiog (meaning a lengthening of dexes are slight modifications of two measureS intro-
the delivery time for products and services) or in- duced several years ago by a prominent English
creased imports. ooonomist.'2 the demand-pull indicator is bere de-
The second basic type of inflation stems from cost fined as the rate of increase of corporale profits in
changes. It is known simply as cost-push inflation. excess of the rate of increase of nominal expenditures,
Cost-push inflation is the overall price increase asso- as measured by the gross domestic product (GDP).
ciated with rises in resource and materials costs, Defined in this manner, the index does not capture
taxes, interest rates, and profit margins. Tbis type of directly the increased backlog effect mentioned earli-
inflation, which has become extremely bard for policy 12 R. G. Harrad, The British Economy, McGraw-Hill, New York,
to deal with, is usually associated witb the industrial- 1963.

76
Figure 10
Inflation by Type in Puerto Rico, 1947-77
+20,-------------------------------------------,

+15
,,
m
~ ,
,

+10

¡l
C,~:,~~~~h
Index
i\
lo"
I
'
'

+5
Rate of
Inflation
i, / A ,~ ,A/'-\ n\1
"-
ro
Q)
>-
"-
\
~.J
¡n ,i
,,3;
" 3;
f
AI1',/ \\ .
.
,1
" 1,
. .
• 11 ¡
1 ... . ¡,
¡"' / \,, ,, \\!
"1
,\'1\1
Q) I :: ~~ 1, ~'Il~:t , I
Q.
...... O I--~~+-._+_t'-~[.
, 1;
,\
,\
" I-!-----jllf'-''\.,·i------:~;~?-~----_il~--__I
,1, ,
e ,
' r1
,
, 1
, \ ,
,1,
1, 1 1';;:'
l'
1
1 ''
11 ''
Q)
,, 1 ,1 ,1"
ü " ~ , 1 , _ ~, ,
"-
Q) ir " 1 , 1 \ ' :'
o.... -: E ~... .! ~ I f , ' .'
; ••••~ 1 ' <# "
-5 .' ,
,
1
1 '
' ,1,
,, 11 '' ','
, 1 '
, 1 '
, l'
:
,,,
~
-10
,,,
:~ Demand·Pull
Inflation Index
-15

-20~~-L~~~~~~-L~_L~~~~~~_L~_L~~

1945 1950 1955 1960 1965 1970 1975 1980


Source: U.S. Depl. 01 Commerce; Puerto Rico Planning Board

77
ero However, when lagged it captures to a consider- least, the demand strength was not sustained. These
able extent tbe inflationary pressure caused by any signs of demand weakness may account for tbe de-
backlog. In the graph, the demand-pull index is cline and general sluggishness of employment in
lagged 1 year. A corre1ation analysis reveals tbat tbe those years.
lagged profile fits the rate of infiation profile better
The cost-nu.h inflation index shows that between
than a leading or unlagged indicator. The need for
1953 and 1969, when the economy's aggregate de-
tbe lag implies that the demand-pull effect seemed
mand appears somewhat weak, there were several
to have required some months to permeate tbe Puerto
Rican price indicators. occasions of significant cost-pnsh when the index
reflected excesses of 4 percent or more. Then, in
To measure the cost-push component of the infla- 1969, cost-push inflation gained additional momen-
tion, the study uses the rate of increase of nominal tum and surged to over 15 percent. Further cost
gross domestic income in excess of the rate of in- acceleration followed in the seventies, persisting
crease in tbe real GDP as the indicator.'3 The index through the recession, and subsiding only in 1977.
formulated in this manner is really a unit-cost meas- All in all, tbe graphs afford a cIear visualization of
ure concepto An upward movement of the index the fact that tbe rate of inflation is a resultant of cost-
means that the rate of cost increase is outstripping push and demand-pull inflation components.
the rate at which real production is rising; henee,
unit cost is rising and productivity must be falling. Wage Cost and Total Cost·Push Comparison
A downward movement in tbe index, on tbe other
hand, means that the rate of increase in production Cost-push inflation is frequent1y interpreted as
is faster than the rate at which the costs of production synonymous with wage inflation. Although the inter-
are rising; consequently, unit cost is falling and pro- pretation in itself is an improper limitation and focus
ductivity is rising. In contrast to the demand-pull of the concept, labor costs usually do constitute a
indicator, the cost-push index is plotted in the graph large share of the total cost of production; and hence,
concurrent with the inflation rateo The price response the changes in total costs ofien correlate cIosely witb
to cost changes seems to be reflected, for the most the changes in labor costs. In order to check the
part, within the same year as tbe cost impact. This pattem that exists in Puerto Rico between labor cost-
conc1usion is likewise based on the analysis of al- push and total cost-push, a calculation of the cost-
teroative correlations for the lead and lag fits that push indicator was made using the rate of increase in
were applied. total wages in lieu of the rate of increase of the gross
domestic income. The altemative cost-push indicators
Inflation Pattern are compared in figure 11. The profiles reveal very
similar pattems of cost-push inflation in their overall
A comparison of the profiles in the graph shows image. However, some minor differences do appear.
that the historie pattero of inflation in Puerto Ric~ For example, somewhat more wage influence than
as recorded by the GDP deflator-seems to mirror total cost influence emerges in the fifties, while the
tbe profile of the cost-push inflation indicator more reverse configuration holds tme in 1976 and 1977
than the indicator of demand-pnll. An outstanding when virtually no wage influence is evident. Even
characteristic of the graph is the strong upward trend though the two cost-push indicators are generally
in the cost-push evident over the entire periodo De- suhstitutable in the Puerto Rican experience, tbe
spite the dominanee of the cost-push infiuence, the differences between them are frequent enough to
demand-pnll index coincides perfectly at several crit- suggest caution in stating any generalizations that
ical spikes with tbe sharp shift in the rate of inflation. asswne wage costs as being identical to total costs
Outstanding instances of tbe coincidence are the
changes which developed in the Korean War year of
1951, the events in 1959 and 1961, and the rebound Productivity and Wage Rate Movements
from the recent recession. Since the cost-push indicator, as explained aboye,
The 1959 spike corresponds to the change of gov- is a quasi-unit cost (or reciprocally a quasi-productiv-
ernment in Cuba. The 1961 occasion relates to the ity measure), the persistent cost-push trend, evident
closing of the U.S. import quota on Cuban sugar. The in tbe analysis, implies that a reduction in produc-
negative demand-pnlls, observable in the years be- tivity growth occurred over the years. Since the cost-
tween the Korean War and tbe mid-sixties, suggest push anaIysis presented in the previous discussion is
tbat the economy may have passed through a periad not a generally familiar one, it seems helpful to
of insufficient aggregate demand at tbat time; or at corroborate tbe impressions gained from the prior
analysis witb the evidence resulting from a more
13 Gross domestic income is income generated by production within conventional comparison of labor praductivity with
the confines of tbe island and thus includes tbe profits and interest
going to outside investors. costs.

78
Figure 11 1977, mainly due to the recession, productivity grew
Cost-Push Inflation in Puerto Rico, 1948-77 only about 2.3 percent per year on the average.
16,-------------------------------------, Nevertheless, the average annual wage rate continued
Total Wages to rise about 8 percent ayear. The performance of
Excess
/ the two measures disc10ses a c1ear trend of much
12
j less deceleration in the wage rate in contrast to the
deceleration of proQuctivity growth, a combination
Gross Domestic
locome Excess of movements causing significant cost-push efIects
10
/ that were picked up in lhe indicator profiles graphed
in the preceding analysis; lhus, lhe two analyses
render the same overall conc1usions regarding the
weight of the cost-push type of inflation relative to
the demand-pull.

Real Wage Rate Performance


Although production costs increased because the
growth in the average nominal wage rate exceeded
the rise in productivity, the growth of the average
-, real annual wage rate did conform c10ser to the pro-
ductivity growlh. The conformity is to be expected,
-4
since the buying power of the wage rate is determined
ultimately by the growth of labor's productivity. The
-, growth rates of lhe wage rate shown in table 7 were
adjusted for the inflation in consumer goods and
1950 1955 lS60 1965 1970 1975 1980
syrvices by applying the GNP consumption deflator.
Souree U.S. O.pl. Gf Commerce; Puerto RiCD Plannlng 60ard
The average rates of change in the real wage rate
resulting from the deflation ca1culation are the fol-
A more conventional comparison of the growth in lowing: for the period 1951-63,7.7 percent ayear;
labor productivity with the rate of increase in the for the period 1963-73, 5.4 percent ayear; and for
average annual wage rate is provided in table 7. The the period 1973-77, -0.9 percent ayear. These re-
productivity used in the table is measured by ca1culat- sults show that lhe growth rate of the real wage rate
ing !he real GDP per employee and the average an- decelerated considerably, paralleling the deceleration
nual wage rate was derived by dividing total com- in the growth rate of labor productivity between 1951
pensation in the economy by total employment. In and 1973 and actually contracted over lhe period
each of the tbree periods cited, the average wage 1973-77. Thus labor productivity did continue to
annual rate in nominal terms advanced fas ter than grow, albeit slowed down from its earlier pace. The
productivity. Between 1951 and 1963, for example, growth rates of the real wage rate averaged abeut
the wage rate increased at arate half again as fast 1.0 to 1.5 percentage points higher than the labor
as productivity, and in the following decade it grew prodnctivity growth rates between 1951 and 1973,
over twice as fast as productivity. Between 1973 and but tracked the growth in productivity fairly c1osely.
If the GDP deflator rather than lhe consumption
Table 7.-Labor Productivity aud Average Annual deflator had been used in adjusting the wage, even.
Wage Rate Puerto Rico, 1951-77 closer results would be expected. The significant
[Average annual percentage ehange] deceleration of real wage rate growth is observable
in the mannfacturing sector as well. In lhat sector,
Average anuna! wage rates
the real wage rate advanced 3.6 percent ayear be-
Period Productivity 1 Nominal :l Real 3 tween 1965 and 1970, on the average, but grew only
1951-63 ____________________ 7.15 10.07 7.67 1.5 percent per year between 1970 and 1976.
1963-73 ___________ 4.20 8.65 5.36
1973-77 ________________ ~ 2.28 7.99 -0.92 Changes in Relative Factor Costs
1 Labor productivity measured by dividing gross domestic 'product
by total employment.
The wage rate changes introduced aboye can be
~.Average annua! wage rate calculated by dividing total compen-
compared to capital goods and land prices, in order
salian to employees by total employment. to gain some notion of thé re1ative changes in the
3 Real average annual wage rate calculated by dividing the aver-
age annual wage rate by the consumption GNP deflator.
prices of the factors of production that occurred
during the industrialization periodo Although the time
Source: U.S. Department of Commerce; Puerto Rico Planning
Board. periods for which the data are available do not

79
Table 8.-lncreases in Factor P,ices and Manufacturing Inflation Behavior of the GNP Components
Wage Rate in Puerto Rico, 1955-76
[In percentagesJ
As mentioned earlier the study explored the sec-
toral sources of the Puerto Rican inflation. The an-
Industrial 1 ponents. The GNP component defiators are derived
Manufacturing Capital goods Iand
Period wage rate prices prices in the preparation of the national product and income
1960-70 _________________ NA
accounts and have 1954 as their index base. The
3.2 7.3
1965-70 ________________ 7.7 3.5 NA deflators are graphed in figure 12 and the average
197G-76 __________________ 8.2 7.8 NA rates of change for several time periods are inc1uded
t Price of prime San Juan industrial land; Tate of increase cal-
in table 9.
culated using average of Iand values between 1955 and 1964 centered alysis consists of a comparison of the infiation found
at 1960 as initia! point of time span indicated.
in the price defiators fm the various GNP com-
Source: Puerto Rico Planning Board. The data in the table show a marked acceleration
of the component prices throughout the overall
perfect1y coincide as is apparent in table 8, the com- period, but the acceleration is particular1y strong in
parison of the inflation rates in input prices does the seventies. The prices of imports and exports show
provide sorne insight into the substitution potential the fastest advauces. The rate of inflation in import
that faced producers in those years. Assording to the prices bordered on doub1e-digit in recent years, and
rates o.f change shown in the table, between 1960 and export prices rose at arate only slightly less. The
1970, capital goods prices apparently did not iu- rising cost of oi! impmts, of course, was the key
crease as -much as the manufacturing wage rate aud factor pressing up import prices. Unti! the seventies,
the average price of prime industrial land. After the inflation in import and export prices had been
1970, however, the rate of inflation iu capital goods very mi!d in comparison with the rates in the other
prices had almost caught up to the growth in the components. It is of interest to note that even in the
manufacturing wage rate. late sixties sorne acceleration in export and import
The configuration of the infiation rates in the prices price increases is evident, reflective of the Vietnam
oí the three basic production inputs suggests that the War escalation and its concomitant inflationary pres-
use of capital was favored over labor and land during sure on the U.S. mainland economy.
the sixties. Interest payments are, of course, an addi- The increase in capital goods prices has already
tional factor in the decision to invest. In the 1970's, been introduced in the factor cost discussion. It wiIl
interes! rates rose much faster than in earlier years. be recalled that inflation in capital goods prices
The accelerated interest rates would have suppressed doubled in the seventies in contrast to the sixties. The
investment, unless the expectations of inflation in price changes in structures were not separated out
product prices rose even faster and certainly faster from the price developments in machinery and equip-
than wages; otherwise the revenues could not rise ment in the prior discussion. The inflation rates, how-
faster than the rate of interest. The deepening of ever, were distinctly difIerent in the two investment
capital that occurred in the development of the econ- subcomponents, as table 9 and figure 12 show. Con-
omy, observable particularly from the mid-sixties on, slruction prices rose much faster than machinery and
would also tend to support the hypothesis that the equipment prices for nearly two decades. It was
during that time when extensive building occurred in
substitution of capital for labor may have been a
both the residential and nonresidential areas of the
significant factor during the development period. 14 economy.
However, further study on this point is needed. In the consumer sector, price increases averaged
u The "deepening of capital" refers to the addition of units of slightly over 3 percent per year in the early fifties;
capital to a production system; strictIy speaking, the units should but decelerated significantly towards the mid-sixties,
possess the same technolgy. The additional increments of capital sufier
from a declining productivity effect. the inflation rate moving down to about half the pace

Table 9.-Average Annual Inflation Rates of GNP Component Deflators Puerto Rico 1950-77
[Percentage change]

Machinery
Gross fixed and
Periad Consumption Government investment Construction equipment Exports 1 Imports

1950-55 3.14 2.16 3.24 2.95 3.85 2.27 2.31


1955-60 2.09 3.00 2.89 2.53 3.57 1.43 1.47
1960-65 1.49 2.67 2.89 3.68 1.37 2.98 1.33
1965-70 3.46 3.01 3.54 3.90 2.67 3.65 3.05
1970-77 6.66 6.51 6.86 7.87 5.81 8.70 9.98

1 Export and import deflators prior to 1955 are identical.

80
Figure 12
GNP Component Price Deflators
in Puerto Rico, 1947-77
300,---------------------------------------------------.

Gross
Fixed
Domestic ------,~d~
Investment

200
Construction

Government

-oo

Imports

Exports

Consumption

Machinery
and
Equipment

50LL-L~-L~~-L~-L~~_L~_L_LLJ_L~LL_L~_L~LJ~

1945 1950 1955 1960 1965 1970 1975 1980

Source: Puerto Rico Planning Board


81
of tbe previous decade. In the late sixties, as the government spending has increased tbrough the es-
Vietnam War activity on the mainland intensified, tablishment of new programs which are largely fed-
consumer inflation accelerated once again. Further erally funded.
inflation momentum developed in the oil crisis, when The major roles of government and public enter-
the mainland inflation rate went into double-digit prises in Puerto Rico have been the economic devel-
levels. The recession brought sorne relief; however, opment programs begun two decades ago and the
the cost-push inflation influence, as shown earlier, provision of sorne basic public services. Sorne public
pcrsisted even across the recession. funds have been invested in the expansion of basic
As in the consumer sector, the rate of inflation in infrastruoture, complementing the tax exemption and
the government sector hovered about a 3-percent other service portions of the deve10prnent programo
annual rate for a number of years. By the current The scope of the government sector has been ex-
decade, however, that rate had more than doubled. panded somewhat in recent years with the addition
Since tbe government expenditure component relates of more social welfare spending, necessitated partly
mainly to the salaries of government employees, the by the abrupt slowdown of growth in 1974 and par-
government sector's inflation rate roughly parallels tially funded by Federal grants. The growth of Fed-
tbe rise in the government's wages and salaries. eral grants has extended to municipalities as well as
The analysis of the average price level changes of to the Commonwealth government.
the GNP components reveals that the Puerto Rican In fact, the Federal Government occupies a central
inflation was largely centered in the construction and position in government's role in the Puerto Rican
external trade areas, the former area exhibiting more econorny. Besides its direct contributions to Com-
inflation over a longer period than other seotors. This monwealth and municipal budgets, the Federal Gov-
pattern might be expected in view of the intensive emment has two other roles: that of an incorne
construction activity that took place on the island support agency transferring money direotly to Puerto
and lasted for more than a decade, as export activity Rican residents; and that of a direct participant in
also rapidly expanded. tbe economy through the operations of Federal agen-
This impact might be expected in an extremely cies in Puerto Rico, mainly Defense Department and
open econorny such .as Puerto Rico. Because of the Veterans Administration programs.
extensive trade flow, particularly with the mainland, The first Federal function is historicaJ1y tbe largest.
the economy's overal! inflation \vas probably largely Throughout the past decade Puerto Rican govern-
determined by external pressures. These effects ap- ments have received 20 to 28 percent of their receipts
peared as cost-push factors in the previous analysis from the Federal Govemment. The personal income
of the inflation. support role is increasingly important, however, for
rapid increases have occurred in Federal transfer
THE GOVERNMENT SECTOR payments to Puerto Ricans in the past 4 years. (A
fourth very important role, discussed in detail in
The rapid growth of the government sector in the chapter VII of the Industrial Study, relates to the
past two decades is one of the most important devel- U.S. corporate tax exemption policies which have
opments in the Puerto Rican economy. The growth stimulated Puerto Riean growth.)
has been fostered by several factors. The increased There are three basic functions of the government
urbanization of the population in the last 35 years policy which have been identified by pubJic finance
and the optimism generated by the apparent success economists. These are stabiJization of the economy,
of industrialization Jed the Commonwealth govern- allocation of resources between the public and private
ment to supply a wider variety of public services. sectors, and redistribution of income among income
These elements were also reflected in the growth of c1asses. Puerto Rieo's small size and high degree of
"public enterprises," which are relatively autonomous interdependence between Puerto Rico and the United
government units, operating much of the sugar in- Sta tes make it harder for the Commonwealth to
dustry, an extended university system, and the tele- carry out the stabilization and redistribution func-
phone service, as well as other public services. These tions than it is for the Federal Government. Yet aH
public enterprises have mushroomed in number and three issues are as controversial in Puerto Rico as
size, supported in varying degrees by subsidies from they are in the United States. Before addressing
the Cornmonwealth in addition to their own operating them, however, an overview of Puerto Rican spend-
receipts. They also have built up large stocks of assets ing and receipts will be helpful.
and financial debt.
A third contribution to the growth of Common-
wealth and municipal government has been the
Government Spending
grants-in-aid received from the Federal Govemment; The government sector, consisting of Common-
like that of U.S. States and localities, Puerto Rican wealth and municipal governments and public enter-

82
prises, has been an important contributor to con- total spending and have grown much less rapidly, as
sumption and investment in Puerto Rico in the last seen in table lO.
20 years. Its contribution to fixed investment has The relative magnitude of total government spend-
been especially important. Several measures of the ing in Puerto Rico in the mid-1970's was roughIy
magnitude of government spending might be used, comparable to that of Federal, State, and local gov-
but one of the most ilIustrative is the percentage of ernment in the United States; the total in each repre-
GNP which government budgets represento This sented abaut one-third of GNP. No exact comparison
focuses on the current operating expenditures of tbe should be drawn, however, since the U.S, accounts
two levels of government, incIuding onIy that part of combine capital expel\ditures with opcrating expend-
public enterprise activity direotly supported by Com- itures, and the functional scope of government in
monwealth revenues. This measure, as seen in table each area is different.
10, indica tes a government role that has risen con- When operating expenditure is broken down by
tinuously but has accelerated most rapidly in the type of payment (as in table 11) a very different
mid-1970's. paUern emerges from that on the mainland. The
lion's share of government spending goes to direct
Table IO.-Puerto Rican Commonwealth and purchases of goods and services and most of this is
Municipal Government Spending in the form of employee compensation. Less goes to
[Millions of dollarsl transfer payrnents than in the United States. Gen-
erous public employee fringe benefits legislated earIy
Total operating
expenditures Budget less in the 1970's contribute lo the stilI-high compensa-
transfers, tion share; currentIy, about 25 percent of compensa-
As per- U.S. Federal as per-
centage of transfers to centagc of tion takes the form of mandatory fringes. Despite
Year Amount GNP government GNP sorne decrease in its relative share tbrough time,
1950 - "-_._._------ $ 110.4 14.6 $ 9.1 13.4 direct purchases in 1976 constituted 67 percent of
1955 ---_.._-_.•.. 176.8 15.5 21.3 13.6 operating expenditures, and employee compensation
1960 ......--..._--.-- 286.7 17.1 44.2 14.5
1965 _..__.•.__....... 548.0 19.8 118.0 15.6
alone was 52 percent. The comparable portions of tbe
1970 1,105.1 23.6 256.5 18.1 Federal budget going to these categories are 34 and
1971 .--------_.._- 1,320.6 25.1 314.7 19.2
1972 ----_.. _---_.. _.. 1.549.2 27.1 413.3 19.8
16 percent, respectively .
1973 ---~---
1,796.9 28.7 491.6 20.8 The only other large category of spending is trans-
1974 - - - - - - - - 1,956.8 28.8 500.0 21.4 fer payments to individuals. Much of thIs is unem-
_._
1975 ._.. .•._---- 2,415.7 33.8 650.6 24.7
ployment insurance and pension payrnents; onIy 7
1976 --_._._-------- 2,617_4 35.2 822_7 24.1
1977 ----------- 2.797_2 37.3 844_9 24_7 percent of transfers, or abont 1.5 percent of total
spending, is categorized as social weIfare spending.
Source: U-S. Department al Cammerce; Puerto Rico Planning
Board. (When direct Federal transfers to individuals are in-
cIuded, transfers become much more sigoificant for
One of tbe causes of this trend is the increasing the economy.) Subsidies to industries incIude both
contribution of Federal Government funds to Puerto public and private enterprises; the largest benefici-
Rican programs. The largest is the transference of aries are private agricultural concerns and a variety
customs and excise taxes colIected and covered back of public corporations. Transfers to the Federal Gov-
by the United States to Puerto Rico, but there is also ernment, which have reached their highest levels in
substantial specific program support for education, the past 4 years, are primarily contributions to the
training, public employrnent, community develop- unemployment insurance and social security fundo
ment, and other activities. Such funds have consti- The distribution of outIays reflects the nature of
tuted a rapidly growing fraction of government spend- the role of Commonwea1th and municipal govern-
ing and of GNP. Domestically funded government ments, which is oriented more toward direct provision
outlays, excIuding the aboye items are smalIer than of services to the public than in the United States.

Table Il.-Distribution 01 Commonwealth and Municipal Operating ExpendituTes


[In percentages]

1950 1960 1965 1970 1975 1976 1977


Total purchases al goods and services 87 80 76 75 71 67 67
(Employee Comp_) (64) (61) (56) (55) (55) (53) (52)
Transfers to individuals 11 15 15 16 17 21 21
Subsidies to enterprises 1 3 2 3 4 4 4
Interest paid _____ 1 2 3 3 5 5 5
Transfers to Federal Government O O 4 3 3 3 3
Total 100 100 100 100 100 100 100

83
The absence of national defense spending and the and lhe significant support given byan outside source,
more limited extent of social insurance prograrns in namely the Federal Government.
Puerto Rico does much to distinguish its spending Looking at the recurrent receipts of the Cornrnon-
pattern from lhat of the United States, as does the wealth General Fund, special funds, and the debt
assignment of sorne public functions to separate repayrnent fund, sorne major characteristics appear.
public enterprises. Most of the capital investment by First, Puerto Rico is like lhe United States in that it
government is undertaken by the quasi-independent has a highly progressive income tax and a corporate
public enterprises. Thls reduces the magnitude of profits tax with rates comparable to lhose in the
goods purchases (largely construction) falling under United States. Corporate tax receipts are lower than
the Commonwealth budget from levels which would they rnight be since most of the new manufacturing
exist if these functions were perforrned directly by corporations on the island reeeive income tax exemp-
the central administration. tion as an inducement to lacate there. Still, these two
The combined capital investrnent budgets of the eategories of income tax provide about one-third of
municipal and commonwealth governments and the total govemment revenue, a proportion which has
public corporations represent a significant portion of remained fairly constant through time.
total Puerto Rican fixed capital investment. Govern- Excise taxes are the only other large tax source.
ment-assisted home building and public works have They have been levied traditionally on alcoholic
been a fairly constant proportion of total fixed in- beverages, cigarettes, and motor vehicles, the last
vestrnent in the last 8 years, while industrial and being a progressive tax according to the size of the
commercial building by public enterprises rose stead- vehicle. These three items now contribute 54 percent
ily until 1976. In 1975 it exceeded the record high of excise tax receipts, although two additional large
proportion of total investment that it comprised in revenue sources have been developed sinee 1975
the early years of industrialization. The total share with the imposition of a general sales tax of 5 percent
of public investment is shown in table 12. For sev- on nonfood purchases (a number of exemptions have
sinee been passed) and a tax on petroleum imports
Table 12.-Government and Public Enterprise Invest- (recently repealed). In 1977 these two new sources
ment as Percentage oi Total Investment in Each accounted for 33 percent of excise revenues, despite
Category the addition of sorne exemptions from the general
sales tax. Moreover, there appears to be a continued
Indus-
trial Public
weakening in the tax collections on imported pe-
and works as Total troleum from the high levels in 1976 through 1978.
com- Machinery percentage public as
merciaI and of total percentage The third single largest saurce of revenue is the
Year Dwellings bldgs.1. equipment investment of total Federal Government, which gives two types of as-
1955 _ 24 46 29.8 11 36 sistance. About tw·o-thirds is grants-in-aid, which
1960 ._
1970 ____ .... _.__
18
17
55 14.0 13 37 support various program efforts mentioned aboye,
30 7.5 ID 28
1972 _.. _ ........._. 21 44 7.5 13 36 the other one-third coming from rebates derived
1973 __ .. __ . ___ .____ 16 51 14
1974 .________ .......,. 16 56
10.5
9.8 13
35 from excise taxes and customs duties collected by
39
1975 ____________ .__ 19 67 12.4 13 47 the U.S. Govemment and reverted to lhe Puerto
1976 __ ._... __________ . 17 62 8.6 13 41
1977 ___ ..' __________ . 17 67 8.2 14 39
Rican Treasury (see table 13).
Tax rates in several categories have been ralsed
lThis inc1udes investment by the Puerto rucan Industrial Develop- in the last few years in an altempt to keep revenues
ment Company, a public enterprise which builds, leases, and sens
industrial and commercial buildings. growing despite lagging income growth and in order
Source: U.S. Department of Cornmerce.
Table IJ.-Sources of Commonwealth Government
Receipts Distribution in Fiscal Years
eral years, it should be noted, the inereasing impor-
[In percentages}
tance of public investment in industrial and commer-
cial building in the 1970's resulted from decreasing 1950 1960 1970 1972 1975 1977
private investment rather than growing publie invest- Income tax", ' .•....---............- ....... 25.6 30.3 30.3 33.2 34.0 32.9
ment. _._
Individual --_._.... .. _......... _.-. 11.9 18.0 18.0 18.7 21.6 22.9

-_
... _......
__ __
Corporate .......-._. ._.......- .......
_-_ .. .. _....
12.3 10.4 10.5 12.8 10.8 8.9
Excise taxes 36.9 35.5 25.8 21.4 20.0 24.9
Property taxes __ ...... _ .... _.. _... _........ 3.0 3.0 4.9 4.6
Revenue Strncture Licenses, fees, permits, lottery,
5.0 2.7
miscellaneous .. _._.. _...... _...... _ ... _ 14.8 10.5 8.4 7.8 6.6 6.1
The structure of the Puerto Rican revenue system Total Federal transfers _._ ..... _........ 17.3 23.0 31.7 34.2 33.7 31.1
Grants-in-aid .......... _..... -_ ...._.... - NA 10.9 17.3 21.3 23.1 21.1
also differs from lhat in the United States. The out-
standing differences stem from lhe re1atively smal! Total ----_......... _-_._.. 100.0 100.0 100.0 100.0 100.0 100.0
seale of the Puerto Riean social insurance system, 1 Includes payments by nonresidents not inc1uded in subtotals.
the heavy reliance on excise taxes on consumer goods, Source: U.S. Department of Commerce.

84
to balance the operating budget in accord with the Table 14.-Selected Trends in Puerto Rican Govern·
constitution. The major increase came in 1975, when ment Spending and ReceiptsJ Annual Gro-wth Rates,
Fiscal Years
temporar)' personal and corporate income tax sur- [In percentages]
charges were enacted; these le~ies were a flat 2 per-
cent corporate and a progresslve personal tax sur- U.S. Federal trans-
Total Tu fers to Puerto Rico
charge 01 Irom 1 to 5 percent, averaging about 2'h and Operating
percent. (The personal surcharge was retroactive to nontax Tax expendi- To gov- To indi-
Yea' receipts receipts tures ernment viduaIs
1974.) The genera1excise tax and the oi! import
levy were imposed at approximate1y the same time. 1970 ..-...--_.-----_... 11.7 10.5 21.7 14.6 NA
Real property taxes, the effective rates of which had
1971 ----._.. _-
_---_..... .. 17.4 16.7 19.5 22.7 25.5
1972 18.7 16.3 17.2 31.3 15.4
dropped steadily due to outdated assessments, also 1973 --_._._.....---_._. 9.7 8.7 16.0 19.0 26.1
_
1974 -_. __....._.. ...- " 4.1 1.6 8.9 1.7 17.5
were raised in 1975 by quadrupling the tax rates. 1975 18.4 17.5 23.5 30.1 70.2
1976 21.9 24.0 8.3 26.5 42.5
Puerto Rico does have a social insurance system 1977 --_ .._......... _---- 5.0 6.7 6.9 2.7 9.5
under which taxes are eollected and transfer pay-
ments made. These tax eontributions do not appear Source: U.S. Department oí Commerce.
under recurrent receipts, sinee they flow into a
separate account, but Ihey do appear in the consoli- year; tax receipts thus grew faster in Ihe midst oí
dated aceounts. Tbroughout this decade these con- recession (see table 14). Spending, on the other
tributions have represented about 12 pereent of total hand, grew at a les ser rate during the recession than
goveroment receipts. Tbey add to the tax burden it had earlier in the decade-the average growth
and finance an important segrnent 01 transfer pay- rate in 1974--76 was about 13 percent compared to
ments, but this it not a discretionary goveroment 17 percent in the previous 3 years. This combination
program and does not receive mueh analysis in of policies exercised a less expansive effect on eco-
studies of Puerto Rican public finance. nomic growth than had previous policies. An at-
With this background on the nature of spending tempted countercyclical public works program had
and receipts in the Puerto Rican Goveroment, one to be abandoned because oí a lack of Cornmon-
can analyze the three roles of goveroment outlined wealth revenue in 1974 and 1975.
earlier in this chapter far the Puerto Rican case. Federal Government spending in Puerto Rico did,
however, provide a countercyc1ical thrust, mainly
Stabilization of Economic Growtb in the fonn oí direct transfers to individuals when
personal ineome needed bolstering. The largest jump
Income and employment stabilization is a fiscal in these payments carne when foad stamps were
.Iunction which has risen to paramount importance extended to Puerto Rico in 1975, although the
in the United States. There is a limited amount one second lar!!est transíer program, social security, also
can say about this function in Puerto Rico, because grew rapidly throughout the mid-1970's. Total Fed-
its economy has suffered very few setbacks to its eral transfers as a percentage of personal income
growth in the postwar periodo The mid-1950's were grew from about 10 percent in FY 1974 to 19 percent
an era 01 slower than average growth 01 gross prod- in 1976.
uct, but until 1974 there has been no period when Federal transfers to Puerto Rican goveroments
countercyc1ical policies were obviously necessary. during the recession grew on an average at about the
Thus, there is only one instance in which the ability same rate as earlier in ,the decade. A very uneven
or desire of the Commonwealth to pursue an active pattern lies behind the 'average, however, as these
countercyc1ical policy can be tested. transfers hardly grew in 1974 and then grew ex-
Spending and receipts figures during the recent plosively in 1975 and 1976. Thus, countercyclical
recession reflect the absence of effective counter- Federal aid to government was late in arriving, but
cyc1ical policies in Puerto Rico. Tbis is not to say in combination with Federal aid to individuals,
that the government is not an important part of Federal spending in Puerto Rico did rise somewhat
the economy or does not foster economic growth. in 1974 befare accelerating in 1975.
One look at the rising proportion of GNP gen- One specific category of Cornmonwealth spending,
erated by government or public investment in infra- employee compensation, has special macroeconomic
structure would dispel that idea. Rather, tbis means ramification. Through most of the ear1y 1970's, com-
that expansion of government spending or changes pensation grew rapidly beca use of employment and
in taxation were not undertaken to smooth out the salary increases. The growth of government salaries
cyc1ical variations in growlh in Ihe mid-1970's. and fringe benefits may be a stimnlus lo bigher wage
Two large tax impositions in 1974-75 led to the demands within the private sector. The government's
fastest increase in the tax burden in the decade up reaction to increased wage demands do directly im-
to that point, surpassed only by that of the following pact on the economy's intemational competitive

85
position. The sharp deceleration of government Such a division is less than clear for an economy
compensation growth in the past 2 years, from an like Puerto Rico's, where sorne normally prívate
average of 10 percent in 1971-75 to about 2 percent enterprises are public1y operated and where many
last year, is a very encouraging development. private firms receive substantial public subsidy in
In looking toward the future of countercydical one form or another. But the general trend in the
policies in Puerto Rico, the limited possibilities for growth of public goods can be discemed from the
such pblicies to be effective should be noted. In the fraction of GNP represented by govemment bndgets,
small, open economy of Puerto Rico, there is a which was discussed earlier. The tax hikes of 1975,
high marginal propensity to import both consumer combined with slower private sector expansion, re-
and producer goods when income grows. When taxes allocated output toward public goods and services, a
are cut, for instance, sorne of the extra disposable trend which began well before the recession. One
income will be spent on domestically produced goods should note that that portion of Ithe budget going
but much will be spent on imports. This means to transfers to individuals will ultimately be spent
that the "multiplier effects" of the policy stimulus by those individuals, reflecting private tastes and
are dispersed throughout the economies from which not the decisions of any government.
Puerto Rico imports, rather than being concentrated The goods and services provided by the Common-
in the local economy. Fiscal policy will, therefore, wealth can be determined from Puerto Rico's budget.
be less effective in stimulating growth than it is in Last year, about 55 percent 01 total spending went
a large country like the United Sta tes. into education, health, and social wellare programs,
Discretionary stabilization policy often requires lor be,th operating and capital expenditures. About
de/kit spending, which in Puerto Rico's caSe must 11 percent was devoted to industrial and special
be confined to the capital budget, since an operating agricultural development projects, with the same
balanced budget is mandated by the Constitution. Iraction going toward protection 01 persons and
Financing the Federal deficit is generally manageable property. The remainder is spent on assistance to
in the United States, where domestic savings are local govemment and prívate enterprises and on
the major source of financing. Puerto Rico's de- general government.
pendence on outside financing, specifically U.S. Increases in government taxes, while they detract
capital, gives it advantages as well as p01ential prob- from private output in the shor! run, do finance
lems in financing any future deficit. Because Puerto spending which stimulates private output in the long
Rican borrowing would represent a small demand runo Expansion of education, infrastructure, eco-
for capital relative to the large U.S. credit markets, nomic development, or even health programs will all
such berrowing cannot "crowd out" private invest- contribute to private productivity.
ment or force up interest rates by putting pressure
on capital supplies. At the same time, Puerto Rico
could be vulnerable to a complete cutoff of its capital
Redistribution of Income
supply if confidence in its economy falls for sorne The third governmental function mentioned is its
reason. role in redistributing income. The redistributive effect
The other major macroeconomic policy instru- of government policy can be judged by considering
ment, monetary policy, is not available for Puerto the benefits 01 its spending programs for different
Rico. The island does not have its own currency income classes in combination with the tax burdens
and relies heavily on U.S. source funding to supply of each dass. If low-income groups benefit more
its investment needs. The principIe behind monetary from government programs than they generally pay
policy is that interest rates can be manipulated to in taxes, the system can be considered progressive,
affect spending. For Puerto Rico, however, interest although such calculations are by nature very in-
rates and the supply of capital are determined in exact.
U.S. capital markets, which are affected by U.S. The Commonwealth's spending is concentrated in
monetary policy. education, health, and social welfare programs; these
In fact, Puerto Rico has experienced healthy three categoríes constitute the bulk of last year's
growth of business investment through its access to budget. In each case, substantial support of sorne
U.S. capital markets. The impossibility of an ex- programs, especially income support programs.
pansionary internal monetary policy has not hindered comes from the Federal Government. The training
growth and development. and care provided benefit many low-income Puerto
Ricans who would not otherwise receive any such
Allocation of Resources services, in contrast to the United States, where more
The second major function of government is allo- of the population could afford to buy sorne education
cation of output between the public and private or hea1th care on its own. For this reason, and be-
sectors and provision of public services and goods. cause there is less spent on general benefit programs

86
uch as defense, highways, or blanket social insur- which is usually deemphasized by economists in the
s nce Commonwealth spending is helping to move United States. Yet the level of public debt in Puerto
~uerto Rico's income distribution toward equality. Rico, which inc1udes Commonwea1th, municipal, and
Despite large amounts of Federal support far public enterprise debt, has been a saurce of con-
govemment programs, substantial tax revenues are cerno Its rise, largely due to public enterprise expan-
raised in Puerto Rico and their burdens must be sion, caused prohlems for Puerto Rico in the New
assess ed . The three largest Commonwealth tax York credit market, particularly because an as-
sources are individual and corporate income taxes tounding 49-perc¿nt increase occurred in the debt
and excise taxes. The income tax is sharply progres-
total in 1974-75, just before the New York City-
sive, with most rates higher than in the United States,
although a different deduction structure makes tax- related upheaval in municipal bond markets in
ab1e incomes different. For example, renters can 197 5. The rate of increase in Puerto Rican public
deduct 10 percent of their rent, up to $240, from debt has slowed markedly in the past 2 years.
taxable income. Presumably the effective burdens Public debt issuance has been a major source of
from the personal income tax system reflect its funding for the growing role of government in the
progressive structure. Puerto Rican economy in this decade, funding publie
Anaiysis of the corporate incame tax is always capital investment and to sorne degree operating
difficult because its ultimate incidence is debatable. expenditures. The expansion of publie works and
In Puerto Rico's case, tbis is complicated by the of basic infrastructure has represented a majar publie
existence of exemptions from this tax. If the tax undertaking, appropriate in a still-developing econ-
were assumed to be passed on to consumers, one omy. The growth of debt can be seen in figure 13
would have to know which industries pay the tax
and its increasing size in relation to GNP appears
and which are exempt to conc1ude anytbing about
its progressivity. in table 15.
The large excise tax collections are perhaps the The amount of debt (principal and interest) which
most unusual aspect of Puerto Rico's tax system. A the Commonwealth and municipalities may contract
general excise levied in 1975 and a petroleum import is limited by the Puerto Rican Constitution in any
tax constitute about one-third of this category, but given year. In tbe case of lhe Cornmonwealth, it is
the largest sources are taxes on alcoholic beverages not to exceed an amount whose debt serviee require-
and motor vehic1es. The latter is probably the only ments inc1uding principal and interest will equal 15
excise which could be considered progressive, since percent of the average internally generated revenues
it does not affee! the 43 percent of (mostly low- for the last 2 years. The proportion of internal
income) households without cars. The tax has a revenues which are devoted to debt financing gives
graduated rate schedule, taxing large cars at much
steeper rates. The presence of some public transpor- Figure 13
Gross Long-Term Public Debt in Puerto Rico, 1950-77
tation in the largest cities means cars are not a neces-
7.0,--------------------,
sity and this excise is progressive in the urban
6.5
context. The greater need for motor vehic1es in rural
areas and in agriculture means that there may be 6.0
a very large burden on the rural poor. The o,¡her
excise taxes are usually assumed to fall about equally
on all income c1asses.
A1though the incidence of corporate income taxes
is in doubt, roughly proportional excise taxes com-
bined with a progressive persoual income tax and the
absence of payroll taxes make the overall tax struc-
ture of the Commonwea1th somewhat progressive.
Inc1usion of local taxes, which are largely property
taxes, does not change this conc1usion. In combina-
lion with spending policies, one can safely say that
government activities in Puerto Rico are a positive 1.5
force toward a somewhat more equal income distri- 1.0
bution.
.5

Public Debt o~
1950 1955 1960 1965 1970 1975
Public debt is an aspect of government flnance SOUfce: Puerto Rico Government Developrnen! Bank

87
Table 15.-Public Debt as a Percentage of GNP subsidy have allowed telephone seervice to be ex-
of Puerto Rico panded, and the downslide of employment in sugar
Public production and refining has slowed somewhat.
Comnton- Municipal corporation Total
Year wealth debt debt debt public debt The broad functiona1 scope of Puerto Rico's public
1968 _ ... ________ .... __ 12.1
acrtivities makes it 'mis1eac1ing tocompare its public
3.0 20.5 35.6
1970 ____________ 10.9 2.5 22.4 35.9 debt with that of any one leve1 of government in
1972 _________..______ 11.7
1973 ______________ .____ 11.8
2.5
2.5
30.2 44.5 the United States. The same functions are spread
33.9 48.2
1974 ___.__.._______ 14.8 2.3 38.2 55.3 among Federal, Sta te, and local governments, in
1975 ..___ ...... ____ ._______ 17.2 2.2 54.9 74.2
1976 _____.. ________ ... __ 17.6 2.3 57.4 77.3
addition to quasi-public debt issuers and private
1977 _________ ._____ .. 17.1 2.2 communications companies in the United States,
1978 _______ .. ___________ 15.1
57.9 77.0
2.0 54.9 71.5 whose total debt may be proportionately as large
Source: Puerto Rico Government Development Bank; Puerto Rico as the Puerto Rican public debt.
Planning Board.
Since so much public investment and debt is
undertaken by these corporations in addition to the
an indication of the strain which Commonwealth
Commonwealth, the burden placed on lhe economy
debt place on revennes; in 1977 the fraction was
by debt service payrnents cannot be measured simply
lOA percent. This ratio has risen steadily over the
by the percentage 01 government spending going to
past 15 years but has been below 10 percent during
interest payments. In fact, there is a complicated net-
most of that periodo
work oí ,subsidy payments 'out oí Commonwealth
Despite the fact that the 15-percent constitutional funas for public corpomtions' operating and/or cap-
limit has not been reached it has had one important ital expenses. Thus, part of ,lhe cost 'OÍ public enter-
effect: the growth of public investment and borrow- prise iñvestment is integrated into the Commonwealth
ing has been concentrated in public corporations budget, while the rest is represented by separate debt
not subject to any legal Iimitations. However, in the service payrnents. For the purpose of estimating debt
1ast 2 years the Government Development Bank burden, it is useful to ca1culate the percentage 01
has acted as agent for these institutions to ensure GNP which goes into the payment ol combined debt
their financial integrity. Three of the ten debt-issuing obligations.
corporations do, however, have the tax revenues of
With the Iimited data available, one can conc1ude
the Commonwealth backing up their credit. These
that in the past 3 years the percentage of GNP de-
are the Sugar Corporation, Public Buildings Author-
voted to Commonwealth and public enterprise debt
ity, and Housing and Urban Renewal Corporation.
service (principal and interes!) has risen from 3.5
Although the rate of increase dece1erated recently, percent in 1975 to 4.6 percent in 1977.
public enterprises' debt mounted in recent years as
Puerto Rico's much lower levels of government
the number 'and scope of these institutions have ex-
debt prior to 1975 imply debt service payrnents
panded. Most of them provide basic services or
probably well below 3 percent of GNP. Assuming
public infrastructure, 'Such as the Water Resources,
that U.S. lending will continue to supply this Puerto
Highway, Public Builc1ing, Aqueduct and Sewer,
Rican borrowing, it becomes a political decision for
Ports, and Maritime Authorities, and the University
Puerto Rico whether this much of its GNP should
of Puerto Rico. These enterprises account for about
be devoted to support ol public investment of the
two-thirds of total public enterprise debt.
sort which has been described.
Two other corporations perform public services
which one might not categorize as basic but which
can be considered public functions. These are the SAVING AND INVESTMENT
Urban Renewal and Housing Corporation and the
Industrial Development Corporation. The latter lends The process of capital accumulation is vital to any
capital to private companies and has a variety of economy because investment is the driving force of
olher functions similar to those of State and local economic growth. Hence, it is essential that ample
industrial deve10pment organizations in the United financing be available so lhat promising investment
States. opportunities may be pursued to the fullest extent.
Two public enterprises, the Telephone Authority Although Puerto Rico was a net c1issaving economy
and the Sugar Corporation, have assumed functions during most of its industrialization, ample saving to
which in the United States belong to the private support the investment boom and sustain rapid
sectpr. Under private ownership, lhese activities did growth in the economy came from the U.S. main1and.
not generate profits high enough to merit expansion The heavy reliance oí the economy on the U.S.
of production, or in the case of sugar to even main- mainland and the implications of that reliance for
tain capacity at a constant level. Public takeover and the conirol of firms and the distribution of income

88
have already been discussed as being one of the Table 16.-Sources 01 Financing 01 Puerto Rican
majar issues confronting the Puerto Rican economy. Investment, 1947-77 1
This section of theanalysis deals with the magnitude [In percentages of total uses of funds]
and distribution of the capital that Puerto Rico
Ratio of
successfuIly accumulated, its profitability and effi- rest of
ciency and the relationship of the investment level world
property
to the real growth rate of the economy. Puerto rucan income
to total
The investment boom that developed under the Externa1 Govem- gross
aegis oi Operation Bootstrap provided strong growth capital Deprecia- Private ment property
Years inflow tion saving saving income
impetus to the Pnerto Rican economy; but by 1971,
the share of real gross domestic product (GDP) de- 1947--63 44.2 31.0 3.9 20.7 13.3
voted to fixed capital expansion had peaked and 1963-73 61.3 24.4 -0.2 13.9 34.3
1973-77 81.6 26.1 -12.7 7.4 54.6
contracted seriously thereafter.
The intensified investment which resuIted from the 1 Percentages may not sum to 100 percent since the external capital
flows were not adjusted for errors and omissions.
boom brought an increase in the 'amount of capital
needed to produce a unit of output, implying a falling
marginal product of the capital, or what is known supplied. While the share of financing accountable
as a "deepening" of capital'5 The capital deepening to the influx 'Of savings doubled during the postwar
and the inflation oi capital stock values in recent years, the share of property income going abroad
years caused the rate of return on capital to decline. increased more !han fourfold.
The recession of 1974-75 exacerbated the decline
and complicated the analysis of trends in the pro- Domestic Savings
ductivity of capital because of the highly erratic
output movements relating to the recession. The While external savings evolved as the mainstay of
recovery of the economy in 1976 and 1977, however, financing in Puerto Rico, private and government
brought about a marked revival in the rate of return saving decIined in importance and internal dissaving
on Puerto Rican capital. intensified. The shifts in the importance of !he sources
of funds are evident in table 16. Puerto Rican con-
Net External Capital Inflow sumers had provided sorne positive saving in !he

An earlier discussion of the relationship between Figure 14


the Pnerto Rican GDP and the GNP pointed out Nel Capilal Inflow lo Puerlo Rico. 1947·77
that the increasing excess of GDP over !he GNP 1800,-------------------------------------,

was a reflection of the rising outflow of factor income 1600


going mainly to the mainland in the form of profits
on capital invested on the island during the indus- 1400
trialization. The growth of the capital inflow in the
1200
period of industrialization was tmly remarkable. In
1963 the net inflow of capital amonnted to only 1000
$250 million. By 1970 it had grown to $882 million;
Business
and in 1977 it reached $1,510 million. As !he inflow 800 ecd
Government
of capital sweIled in dollar terms, its importance ~
rn
Excess of
600 Inveslment
as a source of saving relative to the uses of funds 'OO Over Saving
Iikewise increased. In the interim between 1947 and 'O 400
1963 the capital inflow (net of errors and omissions) "
e
accounted for 44.2 percent of the economy's total ~ 200

uses of funds (see table 16 and figure 14). Between O
1963 and 1973, however, external financing covered
61.3 percent of the total uses of funds and 81.6 -200
Personal
percent between 1973 and 1977. The share of total Saving
-400
property income generated in Puerto Rico received
by foreigners grew much fas ter than the funds they -600

15 In the strlet theoretical sense, the "deepening" of capital concept


-800
applies to additions of identical capital units having the same technol-
ogy. Obviously in reality, technology and employment as well as the
Dature of capital units shifted in Puerto Rico in the time described. -1000 L __..Jcc-__--'-____L ____L __--"____--'-____J
Cornments in the text, consequent1y, referring to capital deepening 1945 1950 1955 1960 1965 1970 1975 1980
and the falling productivity of capital are the net of these many $cUlee_ U S Dept ct Ccmm~rce, Puerlo Rico PIGnnlng Scard
changes of inputs and technology in the econorny.

89
Figure 15 sorne of a positive and sorne negative but which in
Consumption Function in Puerto Rico, 1947-77
their net effect result in an obvious emphasis 01
current consumption over future consumption. How
these influences interact, whether they be cultural
or more direCtly economic in nature, is a complicated
process demanding more attention than this report
can extend. It must also be realized tbat the saving
concept referred to is tbat used in the product and
income accounts. Other saving concepts--such as
one inc1uding saving on a residual from income 01
consumption which inc1udes imputed consumption
values ol durables and housing--would render di!-
ferent impressions, no doubt, of the saving behavior
of Puerto Ricans than the presently utilized saving
concept provides.
The persistence of internal dissaving, as ac-
counted in the product and income accounts, is
important and c1ose1y involved in the issue of eco-
°O~~5~OO~~100~O--~1~W~O--2~OO=O--~~~O~~3~~~~35~OO~-®OO~
nomic reliance on the mainland. Internal saving, 01
Real Disposable Personal lncome
course, can be "forced" within limits, by taxation.
Constant 1954 Dollars Consumer taxes have risen substantially relative to
SOU"'": U,S. oept. 01 Commerce: Puerto Rico PI""ning Board
incomes in Puerto Rico in tbe post-World War II
years. In 1950 personal disposable income would
early years as the consumption-inoome plot in figure have been 2.4 percent greater without the taxes
15 reveals, but personal dissaving was by far the deducted; in 1960, 3.0 percent; in 1970, 5.6 per-
dominating behavior. By the time of the investment cent; and in 1977, 6.9 percent. Counteracting this
boom of the sixties the private economy was a growing tax impact, however, has been the growth
chronic net dissaver. The government sector was to of transfer payments. Puerto Rico taken in the ag-
follow. gregate, shows a "tax effort"--the ratio of taxes to
personal income--very much in line with many
The persistent dissaving among consumers in
States, about 15 percent. However, since no Federal
Puerto Rico is frequent1y cited by Puerto Ricans,
taxes are paid by Puerto Ricans, mainlanders are
and outsiders as well, as consumer behavior unique
taxed an additional 15 to 20 percent in Federal
to the island. The c1aim is not easi1y verified, how-
taxes. Taxes in Puerto Rico as an aggregate propor-
ever, since the national accounts of most economies
tion of GNP also seem low when compared to many
are kept on the basis of the United Nations account- underdeveloped economies, according to sorne evi-
ing scheme which does not indude the personal
dence.
disposable income measure. Therefore, in order to
ascertain the uniqueness of the Puerto Rican dis-
saving propensity, comparative information from FinanciaI Intermediation
various economies including the direct taxes consum- The paucity of internal savings in Puerto Rico
ers pay would be necessary. may result partially from a smaller variety of finan-
Although the singularity of tbe Puerto Rican per- cial instruments and institutions available there than
sonal dissaving in respect to personal disposable to mainlanders; however, given the generally broad
income can not be easi1y verified, information from development ol facilities lor banking and investment
comparable economies regarding consumption in on the island this possibility seems rather implausible.
respect to personal income--income after transfer It is possible that consumption was attractive even
payments but before tax deductions--seems to indi- to the surplus income units, upgrading their standard
cate that the Puerto Rican saving behavior is not ol living, or that investing in mainland financial
unusual, Puerto Rican consumption being not unlike instruments was more secure and remunerative than
tbe economies as a percentage of income. saving through local debt instruments. Mainland
Altbough dissaving by consumers in respect to banks and insurance companies were apparent1y in-
personal income did occur at times, positive saving c1ined to use their funds on purchasing short-term
was the more prevalent condition. The persistence investments or in investing tbeir funds in mainland
of dissaving among Puerto Rican consumers in re- oompanies. Local companies were, therefore, largely
spect to personal disposable income does raise sorne denied the receipt of longer term funds for invest-
questions concerning the underlying influences-- mento Even a local company witb a somewhat in-

90
novative management or technology often, it seems, Figure 16
to have faced a difficulty in attracting equity or debt Gross Fixed Investment in Puerto Rico, 1947,77
financing. The greater attractiveness of mainland
saving opportunitie¡; opposed to local probably dis- ,.000~~~~
couraged local entrepreneursbip and extended Puerto r" ,'"'"' \
Rican reliance on foreign direct inve¡;tment. ,-/ / '\.. \.
500f--------------------/,f~,-/--.7,~--~',,-----i
'.,
Investment and Finance
The availability of plentiful foreign funds to Puerto
./
../ .i':\_ Public Ehterprises
./Privatc Enterprises f.~l
Rico underwrote the success of tbe inve¡;tment ex-
pansion and permitted tbe economy to attain the
unusually bigh rates of real growth evidenced during
the industrialization process. Provision 931 (now
936) in the U.S. Tax Code, as well as the exemptions
and subsidies extended by tbe Puerto Rican Industrial
Incentive¡; Act, assisted foreign investors direct1y by
augmenting their rate of return appreciably. The
tax breaks and subsidies granted under Operation
Bootstrap, however, may not have been tbe crucial
factor in investment decisions since tbe profitability I ; 'o"

í f ~ r",/'Government
liI , '" \

of Puerto Rican capital vis-a-vis the mainland (as ! /"/" ....1\. ..1
will be shown subsequent1y) was impressive even ;
¡ ,
I
¡ 1
allowing for mainland taxes. The incentives offered ¡ ,

to firms and the special recruitment of firms carried "


H
U

out un del' Operation Bootstrap, it seems plausible, ¡ I


1P9L45:-"-~'9:"5~O~'-C:'9C:5c"5~~'c"9':-60~~':"96~5~~'~9L7~O~~'-'97-5~'-"-'1980
I

may have ultimately been more influential in ex-


tending valuable publicity about Puerto Rico to SO\Jrce; Puerto Rico Plannlng Board

investors and thus stimulating their interest in the


island as a potentially profitable production site than Bootstrap (see figure 16). Gross domestic fixed in-
they were iu adding to the marginal efficiency of the vestmeut (GDFI) advanced in real terms at an aver-
investments. On the other hand, it can be argued age annual rate of 10.7 percent in the years from
that premium profit margins were needed to attract 1947 to 1963. Residential investment rose at an
firms because of the uncertainties involved iu off- annual rate of about 15 percent and nonresidential
shore investment in the earlier years of Puerto Rico's investment at 10 percent during tbe perlod (see table
iudustrialization. 17). The prlvate sector contributed nearly 60 percent
Whatever influence the incentive aud recruitment of tbe total fixed capital formation, while public
efforts provided, Puerto Rican inve¡;tment clearly euterprises accounted for 26 percent, and government
took off and grew impressively under Operation 15 percent. In tbis early perlod of indnstrialization,

Table 17.-Gross Fixed Investment and Capital Stock in Puerto Rico, 1947-77 1
[In constant 1954 dollars]

Average annua! level Percentage of total

1947-63 1964-73 1974-77 1947--63 1964-73 1974-77

Gross Fixed Investment:


Total _________________________________ ___ _ ~
$ 209.8 $ 719.8 $ 698.8 100.0 100.0 100.0
Private enterprises ____________________________ ~ _________ _ 130.4 504.0 422.1 60.1 70.3 60.6
Public enterprises ________________ .____________ _ 50_1 126.2 175.3 25.5 17.4 24.8
Government ______ . ___________________________ _ 29.5 88.8 101.4 14.5 12.2 14.6
Residential _________________________________ _ 41.0 166.9 131.2 18.8 23.8 18.5
Gross Fixed Capital:
Total ____________________________ _ 2,806_7 7,259_2 11.786.8 100.0 100.0 100.0
Private enterprises _____________________________ _ 1,471.7 4,436.7 7,296.9 52.2 60.6 62.0
PUblic enterprises _________________________________ _ 736_1 1,656_0 2,695.1 26.0 23.1 22.8
Government _____________________________________ _ 598.9 1,166.4 1,794_9 21.8 16.4 15.2
ResidentiaI ____________________________ _ 689.9 2,211.8 3,628_0 24.6 30.5 30.8

1 Component figures may not sum to totals due to rounding or data inaccuracy_
Source: U.S. Department of Commerce; Puerto Rico Planning Board_

91
about 19 percent on the average of GDFI was being compared to $88.8 million in the 1964-73 decade.
allocated annually for housing. As in the case O'f public enterprise investment, how-
In the decade between 1964 and 1973 GDFI ever, the average spending level does not capture
growth decelerated somewhat to an averag~ of 8.4 the dropoff that is caugbt by a year-over-year com-
percent per year. Nonetheless, the average yearly parison of the endpoint years of tbe periodo Govern-
level of investment in constant 1954 dollars was ment investment dropped between 1973 and 1977
more than three times the average between 1947 from $135.8 million to $87.2 million, in constant
and 1963, $719.8 million compared to $209.8 mil- 1954 dollars, c1early, not a stabilizing influence on
lion. AlO'ng with this growth carne a significant shift the economy. In percentage terms, government in-
in the composition of the investment. Private enter- vestment contracted nearly as much as private invest-
prises increased their average share O'f the GDFI by ment, while public enterprise investment contracted
10 percentage points over the 1947-63 average, about two-thirds.
bringing it to 70 percent. The average share provided Altbough the contractions deseribed aboye were
by public enterprises decreased frO'm 26 percent to severe, the bruut of tbe ecouomie setback fell on the
17 percent and the government share dropped from residential construction, where investment contracted
15 percent to 12 percent. The share going to housing 55.5 percent from 1973 to 1977, in real terms. Tbe
rose from 19 percent to 24 percent. In constant 1954 level 01 spending plummeted from $193.5 million
dollars, the yearly average investment in housing to $86.1 million in 1954 dollars. Tbe contraction
between 1964 and 1973 was four times the average pulled housing investment below the level 01 1963.
in the 1947-63 periodo Tbat year preceded the great housing boom wbich
By 1973 the investment boom had large1y run its ultimately extended over a decade, peaking in 1972
course. The worldwide inflatiO'n, the crisis in energy at $197.7 million in constant 1954 dollars. Residen-
supplies, and ultimately the 1974-75 recession top- tial investment continued high but decelerated in
pled tbe expansiono Paralleling the worldwide slow- 1973 and the collapse lollowed, causing heavy losses
down of pro duction and capital accumulation, the for many investors in tbe bousing expansiono
accumulation of fixed capital in Puerto Rico was The feverish constrnction 0'1 condominiums tbat
severely reduced. Between 1973 and 1977, fixed had developed proved to be excessive, resulting in
investment in constant 1954 dollars dec1ined 36.3 a substantial inventory. However, as the economy
percent, from $565 million to $360 million. The continued to recover and expand in 1978, the inven-
depression O'f fixed investment trimmed the yearly tory dwindled.
average for the period from $504 million to $422
million. Capital Stock of Puerto Rico
The crisis and recovery years of 1973 through
1977 brought about further changes in the sectoral The acce1erated accumulation 01 fixed capital in
distribution of' the investment. Private enterprises tbe sixties and early seventies increased tbe Puerto
provided only 61 percent oí tbe GDFI in lhe period, Rican capital stock by a substantial margino Tbe
compared to 70 percent as an average between 1963 increases caused shifts in tbe sectoral composition
and 1973, leaving lhe share at virtually its 1947-63 01 tbe capital stock. Summary data relating to tbe
average. Tbe contraction of tbe private sector's share average dollar levels and percentage shares 01 Puerto
caused the public enterprise and government shares Rieo's gross fixed capital stock have been induded
to increase; the former, from 17 percent, tbe average in table 17, grapbs of tbe components of the capital
for tbe 1963-73 period, to 25 percent; and the latter, items appear in figure 17. The average capital stock
from 12 percent to 15 percent. In cO'nstant 1954 estimates shown are in constant 1954 dollars and
dollars, the average annual investment of public were derived from estimates of the Puerto Rican
enterprises increased from $126.2 million for the capital stock prepared especially for tbis study.
interim between 1964 and 1973 to $175.3 million The estimates were made by using the perpetual
for the period 1974 to 1977. Tbe increase was due inventory metbod applied to GDFI data recorded in
largely to an upsurge in public enterprise investment tbe Puerto Rican national ineome and product ac·
spending in 1975. A comparison using 1973 and counts for the years from 1947 to 1977.
1977 as period endpoints sbows a decrease in invest- The perpetual inventory metbod assumes that tbe
ment for the sector from $150 million to $119.1 value O'f tbe gross capital stock in any given year
million, or about 20.6 percent in real terms. Public is equal to the accumulated values of the gross fixed
enterprise investment tbus tended to be procydieal investment from prior dates minus the value 01 (be
in the downswing. discarded capital. Tbe discards 01 capital are assumed
Government investment averaged $101.4 million, to be 85 percent of tbe items listed in US. Internal
in constant 1954 dollars, between 1974 and 1977, Revenue Serviee Bulletin F (1942 edition). Tbe re-

92
Figure 17 $2,211.8 million between 1964 and 1973 in constant
Gross Capital Stock in Puerto Rico, 1947-77 1954 dollars. The heavy emphasis on residential
construction raised tbe share of total fixed capital
100.000~~~ aIlocated to housing from 25 percent to 30 percent.
50,000 _ _ . _ _ _ _ _ . _ _ _ _ _ _ _ _ . _ _ Despite this progress in housing, the share of capital
aIlocated to residential use was still considerably
below the U.S. mainland share, wbich averaged about
48 percent of total economy's capital between 1964
and 1973.
Considering the fae! !hat Puerto Rican investment
was seriously depressed between 1973 and 1977,
the total gross fixed capital stock was more than
60 percent on a yearly average basis aboye the
average for the 1964-73 decade. Tbe depression
of investment between 1973 and 1977 appeared to
have líttle effect on the distribution of Puerto Rican
capital which bardly changed from !he previous
decade. However, when the 1973-77 distribution
is compared to the average for lbe 1947-63 period,
sorne rather significant changes show up. Tbe share
of private capital had grown 10 percentage points,
for example, while the public enterprise capital share
was down 3 percentage points and the govemment
100~~~~~·~,'~~~'~.~~~~~~~~~~ capHal share was down 6 percentage points. These
1945 1950 1955 1960 1965 1970 1975 1980
long-term compositional changes reflect the drift
Sou"",' u.s Dept 01 Commerce; Puerto Rico Plannlng Board
toward more capital-intensive private enterprise pro-
tirement pattem of capital was derived from a modi- duction that occurred as tbe industrialization of the
fied Winfrey S-3 distribution centered on lhe average island progressed.
life oi a given type of capitaP6
The net capital stock was estimated by use of a Rate of Return on Puerto Rican Capital
straight-line depreciation technique. The depreciation An essential factor in the decision to invest is
thus derived was then deducted from the gross fixed the profitability anticipated from the investment. Due
capital stock estimates. Three different valuations to changing conditions, tbe anticipated retum on new
of the capital stock were made: Constant cost in investment is not necessarily equal to lhe rate of
1954 doHars, current or replacement cost, and his- retum on existing capital in an economy. The going
torie costo The GDFI implícit price deflator was rate of retum on capital, however, may serve as a
used to convert the current-dollar investment values belpful ¡mideline to the profitability of additional
to a 1954 constant dollar basis. In making the cur- capital. When examining profitability historically as
rent cost valuation, the replacement value of the in the present analysis, aH rates of retum, of course,
capital in the year being estimated served as the are actual rates of retum and cannot be taken baldly
cost measure. Lastly, in making the historic cost as predictors of future rates of retum. Historic rates
valuation, the investment was evaluated in terms of of retum on capital can, nonetheless, provide sorne
the prices current in the year the investment was insight into the- relative investment conditions that
made and the quantities then being aggregated. The prevailed between economies, industries, or regions,
constant cost valuation appears in table 17 because and to that extent, assist in assessing future rates
it is a surrogate for the physical volume of capital. of retum. Puerto Rican and U.S. mainland rates of
Between the first and second periods shown in the profit are compared in this section with these pos-
table, the average gross fixed capital stock increased sible benefits and shortcomings in mind.
about 159 percent mainly due to the capital accu- The historic rate of retum on capital in Puerto
mulated by the private sector. That sector's share of Rico is compared to the U.S. mainland in fignre 18
tbe total stock increased from 52 percent to 61 per- and table 18. The average rates of retum are shown
cent as year1y averages between the periods. Resi- for the three time intervals previously used in the
dential capital stock ro~e significantly from a yearly review of investment and !he capital stock develop-
average of $689.9 million between 1947-63 to mento Rates of retum were ca1culated for both cur-
rent and historic-cost valuations of the capital stock
16 This rnethodology closely parallels that used in derivíng the U.S.
Departrnent of Comrnerce capital stock series for the United States. and on a before- and after-tax basis. The results

93
Figure 18
Puerto Rico and the United States while the aver-
r
Rate 01 Return on Gross Fixed Capital
in Puerto Rico and United States, 1947-77
100 , - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,
ages of the historic-cost rate of return decline only
between the first two periods, but show virtually no
I
¡
change between the second and third periods, when

50
, ,"' "
Puerto Rico
P~Enterp''''''''

;¡ I
Rale of Returrt
_ Historie COS! Basi.

'\
Privat. and PubUc EIlterpr;ses
Rate 01 Rerum
Historie Cost Baois
",", ""
Private Ente,prises
the inilation accelerated.
The Puerto Rican profit rates were ca1culated
inc1uding and excluding public enterprise capital
in the base. Since about one-quarter of the Puerto
\ ...... -.. -~........ c"R:..~tb!~~~s"'
'\
-- \
...... /
Puerto Rico
Private and Public Enterpri •••
Rican stock of fixed capital belongs to the public
enteqirises, the inc1usion of such capital depresses
. ....'; . ..-;".,
..:-....... / --- .. - ............
¡ ...... Rate 01 Ilel\lm
the rate of return by about half. The public enter-
'---.J-----------, '- ...... /.,." ,#.. " --
Curren! Cost Bas;s

.. .......... -...... -........


......:,......
o;
............ ........' prises have operated essentially on the basis of
roo
U}
..
;; ...... .. ...... Oo. _......
.....:..... /
. . .. ~':~"'-"'.::-"
..... efficiency pricing, a technique which prices output
o
"g at the average cost of produotion. With efficiency
eó 10 pricing, the profits oí the public enterprises approach
~
e
w
o
O;
/ zero, or are possibly negative as in recent years.
The implicit return on capital, i.e., the real mte of
a.
5 /
United Slates
Before-Tax
interest, although eamed by the public enterprises,
is considered a cost of current operation and does
Rate 01 Return
Historie Cos! Bao;.
not appear as profit. To properly compare Puerto
United Stl.tes Rican profit rates with those of the mainland, the
Before-Tax
flate 01 Ileturn
CUJTan! Cost 8asis
United SIales
After-Tax Uniled Stales public enterprise capital must necessarily be ex-
flate 01 Rotum After-Tax
Historie COS! Basis Hme of Relum
Currem Cost Basis
cluded from the capital base used in the calculations
since no comparable component of capital exisís in
the mainland economy.
The rates of retum in the two economies can be
1945 1950 1955 1960 1965 1970 1975 1980 compared in two ways: (1) in terms of their ratio
Source: U.S. Dept. 01 Comrneroe; Puerto Rico Planning Board.
or (2) in terms of the percentage-point differential
existing between them. On the basis of the first
directly reflect the significance of the current-cost comparison, the Puerto Rican rate of return on pri-
a1ternative valuation of the capital stock in determin- vate capital was very nearly two times the beforetax
ing the rate of retum. Due to the inflation of capital rate of retum for corporations on the mainland and
goods prices in recent years, the current- (or replace- about three times the after-tax rate of return. The
ment) cost valuation has been sub&tantially greater results of the percentage-point differential compari-
tban the historic-cost valuation. son of the profitability are presented in table 19.
As a result of the divergence between the two The profit differentials found there range from 2.60
different valuations, the rate of return based on the to 22.58 percentage points, depending on which
current-cost valuation of the capital is considerably capital valuation is selected. On the current-cost
lower than the historic-cost rate of retum. The perio<! basis, profit differentials have narrowed OVeT the
average of the current-cost rate of return also shows three periods recorded in the table. The narrowing
a downward trend over all three periods in both of the differentials reflects disproportionate rates of

Table 18.-Average Annual Rates of Return on Gross Fixed Capital', 1947-77


[In percentagesl

Puerto Rico

Private and public United States 2"


enterprises
Current-cost Historie-cost
Current- Historie- valuation valuation
eost eost
Period valuation valuation Before tax After tax Before tax After tax Prívate enterprises
1947-63 ________________________________ ~_~____ 15.54 22.17 11.37 6.55 17.15 9.94 22.97 32.52
1964-73 _ _ ._._~ ______________ ~ 12.20 15.87 9.42 5.57 12.01 7.19 16.91 21.15
1974-77 ________ ~ ________ .______ .. __ ~_._____ 9.44 15.42 6.84 4.76 10.99 7.62 13.53 21.54

1 Profits used in calculating rates of return inc1ude inventory valuation adjustment (IVA) and exc1ude capital consumption adjustment.
2" U.S. rate of return is average rate of return for aH corporations.
Sources: U.S. Department of Cornmerce; Puerto Rico Planning Board.

94
Table 19.-Differentials Between Puerto Rican and United States Average Annual Rates
oi Return on Gross Fixed Capita, 1947-77
[In percentages]

Private and public enterprises Private enterprises

Current~cost Historie-cost Current·cost Historie-cost


valuation valuation valuation valuation

Periad Befare tax After tax Befare tax After tax Befare tax After tax Befare tax After tax
1947..:.63 _. -________________________ 4.17 8.99 5.02 12.23 11.60 16.42 15.37 22.58
1964-73 ____._________________________ 2.78 6.63 3.86 8.68 7. 49 11.34 9.14 13.96
1974-77 ______________________ 2.60 4.68 4.43 7.80 6.69 8.77 10.55 13.92

infiation in capital goods and output prices between their components can provide some understanding
the two economies, the Puerto Ricau rate of retum as to the sources of the differential in profitability.
succnmbing more than the mainland rateo Ou the
historic-cost basis, the differential remained fairly Decomposition of the Rates of Retom
stable, although the before-tax ra,tes of retum showed
some increased differential between the 1974-77 The aggregate profits of an economy can be ex-
and the 1964-73 periods. The stability of the differ- pressed as the gross domestic product minus total
entials on the historic-cost basis simply reflects the wages and salaries (Le., wage bill) minus total pay-
stability of the rates of return when ca1culated on ments to property (Le., interest and rent) minus
that basis. capital consumption allowances (with their adjust-
Although the differentials were usually smaller ment for oapital goods price changes), indirect busi-
after 1964, the before-tax profit differential on pri- ness taxes and nontax liability plus business transfer
vate capital still averaged 6.69 percentage points payments less subsidies. The capital consumption
between 1974 and 1977 on the current-coot valua- allowances, taxes, the nontax liability, business trans-
tion basis. The differential was less than a percentage fer payments and subsidies can be lumped together
point below the 7.49-point average differential re- with ,the interest and rent payments as a residual
corded between 1964 and 1973, when the economy component, leaving only two cost components. The
was booming. The corresponding after-tax profit aggregate profits can then be expressed as:
differential did narrow more, averaging 8.77 points
between 1974 and 1977 compared to 11.34 points Profits=GDP - Labor-Residual
between 1964 and 1973. On the historic-cost valua-
tiou basis, the before-tax profit differential increased This expression permits the rate oí retum on capital
to 10.55 poiuts on the average from 9.14 points to be decomposed into the three right-hand compo-
between the 1964-73 and the 1974-77 periods. By nents oí the equation once the equation is divided
the same comparison, the after-tax differential re- through by the appropriate value of the capital stock.
mained virtually the same. The equation then becomes:
Allowing that the data are accurate, the average
profit differentials have been sizable. How much Rate of Return=GDPjCapital.....,Labor/Capital-
of the differential represents greater capital efficiency Residual/Capital
in Puerto Rico is difficult to assess. lbe presence
of transfer pricing techniques among mainland firms If the capital measure is the gross capital stock, as
operating in Puerto Rico is one factor that c10uds is the case in the present analysis, the rate of return
any comparison of the profit rates between the two applies accordingly.
economies. Significant transfer pricing distortions The first component on the right is the reciprocal
would tend to exaggerate the island's profits. In of the capital/output ratio--capital needed per unit
addition, the analysis should be expanded to take oí output-in dollar terms. The second component
into account [he concentration oí profits in certain is the labor I capital ratio in dollar terms. lbe laUer
industries. This concentration would tend to aggra- ratio measures the capital-intensity of the production
vate the comparison between Puerto Rican and U .S. process in value terms. The higher the ratio the
rates of return, particularly in recent years. High more the labor expenditure per dollar of capital
productivity, relatively high wages, and distributive used in the production system. Since the interest,
effects of this concentration could in part explain rent, and miscellaneous expenditures comprising the
the large differential (although decreasing in recent fPsidual component are not large and about the same
years) between U.S. and Puerto Rico indicated magnitude in the two economies, they are ignored
earlier. A decomposition of the rates oí return into in the present analysis without loss of understanding.

95
Since lhe GDP is a critical component in the less, however, in the 1970's. Part of the difference
decomposition of the rate of return, and in Puerto can possibly be explained by the fae! that outpU!
Rico's case the value of the public enterprise product of lhe public enterprises is included in the Puerto
cannot be separated out, the corresponding stock Rico GDP. Since the public enterprise output is
of capital used in the calculation included the public priced at average cost, or approximately so, the
enterprise capital. As mentioned earlier lhe main- product value would tend to be less than if the com-
land capital stock is not directly comparable. This position of lhe product had no component of public
affects lhe decomposition likewise, depressing the enterprise production invol ved or a smaller one.
output/capital ratio more than lhe two cost compo- Beyond lhat matter, however, the lower GDP /
nents. capital ratio in Puerto Rico, suggests a lower average
The decomposHion of the rates of return in Puerto productivity of the economy's capital. The GDP /
Rico and the United States is shown in figure 19. capital ratio appearing in the analysis happens to
be in value terms, so it is not a measure equivalent
Figure 19 to the average physical prodnct of the capital stock.
Decomposition 01 Rate 01 Return on Gross Fixed Capital The next section, however, will deal wilh the capital/
in Puerto Rico and United States, 1947-77
(Current Ces! Valuation)
output ratio in real term~s. That ratio is higher in
100,-------------------------------------, Puerto Rico for the private and lhe public enterprises
Unít.ti States
GDP/Capital
than in the business sector of the United States by
Ratio !he order of magnitude of about 2.5 to 1.6 for a
period extending over more than 2 decades of the
50
_J-----------------------:::---::-- -...0_. . . -,
'"
post-World War II years. The comparison mean s
that the average productivity of capital on the island
was about two-thirds tha! of the mainland, precisely
..., ..........,
/"
Puerto Rico .......... the ratio found in lhe decomposition in valne terms .
.. GDP¡C~p;tal
~ ... ~;,,,,,,,,, ...... _ ....... __ ~ ...... - ....... __ .... _ .. ~ Ratio The labor/capital ratio in Puerto Rico, according
o; " .... Puerto Rice to the decomposition, was about two-thirds of the
ro .\........ __ .. - - ......... __ Puerto RiCo' ........ yb~~;,;Pilal ratio in the United States from 1947 to the mid-
o
"
<JJ ...................................... .t.::~a!e 01 Retum ............ _
1960's, when the ratio fell to one-half and less of the
.~
10 "~;::~t'G~~~'1-.t"=-.
mainland's ratio. The disparity in the ratio of labor
~ Unired
Rale 01 States
Relurn \
~
e
Befo'e Taxes ..t ~ value to capital value indicates a much greater
ID
2
~-." ," ............"....
........ "...... lo ....
capital-intensity of production in Puerto Rico. The
ID /l Uníl"ti States , / \
a.
•/ l, Resld~~I{;;"P¡t.~,/ Puerto Rico ratio's decline over the years means that a far greater
, Residu.I/C"p~al
5 " l,' Ralio input of capital (with deepening) was made than of
:
: l
l l
" labor in the production system. The labor/capital
.::•
: l,
•" •
\:
\,'
" Notes:
Aate of Rewrn ~ GOP/Capital - Labor/Capital -
Residual/Capital
ratio in value terms is a functión of both the volumes
and unit prices of the inputs. Allhough the average
: \ :
Residual ~ Gapilal Consurnption Allowances + wage rate in Puerto Rico stayed around 40 percent
·•••
Indirect Business Taxes + Business

""•
Transfers _ Subsidies of lhe average mainland wage rate, total labor costs
Prlvat. and public enterprise capital used for
Puerto Rican oalculation.
rose faster than on the mainland because of the
• greater rise in employment. Manufacturing employ-
ment in Puerto Rico, for example, increased 35
1945 1950 1955 1960 1965 1970 1975 1980 percent between 1965 and 1973, compared to 11
Source: U.S. Dept. oi Cornrnerce; Puerto Rico Plannlng Board
percent on the mainland. This difference would tend
to raise the labor/capital ratio in respect to the
Three -significant points can be ruade from lhe United Sta tes ratio if the value of tbe capital did
comparison of the two mtes. First, both the GDP / not change. Capital prices on the other hand, were
capital ratio and lhe labor/capital ratio trended probably about the same in tbe two economies and,
downward in Puerto Rico's economy over the three consequently, changed at the same rates. In the 8
decades of industrialization in contra~t to the be- years between 1965 and 1973, however, lhe Puerto
havior of lhese ratios in the mainland economy at the Rican real stock of capital expanded 102 percent,
same time. In contrast to the Puerto Rican trends, while corporate capital on the mainland grew 43
the two ratios were neady stable in the U.S. economy. percent. Hence, lhe increase in the use of capital
A second significant finding is that the two ratios was much greater in Puerto Rico than in the United
in the Puerto Rican economy were considerably States, lhus depressing the labor/capital ratio in
smaller than the comparable mainland ratios. The value terms and in real terms over time and in re-
GDP/capital ratio, for instance, was about two-thirds spect to the mainland.
of lhe U.S. ratio over most of the time, falling to A tbird most important paint is also revealed by

96
the comparative decompo~¡tion of the rates of return. Figure 20
It is that the Puerto Rican labor/capital ratio being Ratios 01 Gross Capital Stock
to Gross Domestic Product (GDP) 1947-77
roughly half of the similar U.S. ratio and the GDP / (Constant 1954 Oollars)
capital ratio abaut two-thirds of the U.S. ratio ac- 8,--------------------------
counted for the Puerto Rican profit differential
vis-a-vis the mainland which was discu~sed in fue
previous section. Althongh the average productivity 7
of lhe capital was less in Puerto Rico, fue lower wage
cost and the intensive use of capital netted the higher
rate of retum. The differential profit margin vis-a-vis 6 j
the mainland also reflected a substantially different /Incremental .'.'
::
concentration of industries in fue Puerto Rican econ-
omy as opposed to fue mainland. 5
,/Capital/Output

1
:!
Ratio'
..
!!
: :
I ,

" I I
" , 1
:: ' I

~,:'" .!1 IT\\?i:,Jl.·\.!\\


CapitaI-Output Ratio o
~ 4
The decomposition of the rate of retum on capital o:
l.
involved the output/capital ratio in value terms, a
ratio which was interpreted as a produetivity meas-
'..
'
:~ -',~ ¡~ ~
3
ure. In capital analysis, the efficiency of capital is
usually measured in real terms, however, The anal-
• ,//''''t.
I
.:-. .
,~.~..
I I
"~"f'"
I I i ''. .,".\,
' ,l• ...,1../
."' ,1
':l' -,
1,
I
..: ••
l!
~

ysis foeuses on a reciprocal measure of the earlier


I
,~
I
: /f U
,::'.''t.,\: ¡-,: :
2
I
l'
.~..! ,. " U 'j , ••
ratio, the capital/output ratio (COR), which can be ~
I
:
I
r l' l ¡:
¡ I •••
represented symbolically as K/GDP. The ratio I , ;,

specifles the amount of capital needed to produce \/ I!


; I
¡ ,
'Negative Ratio Value. Are: 1975, -6.162; 1974, _222.214. ¡ ,
a unit of output. Since the ratio involves physical 'Nagalive Ratio Values Are: 1976, ·55.724; 1975, -55.50':
;
¡ I
1

1974, -55.564; 1973, --53.055. ;. I


units, it is the reciprocal of the average physical ¡ ,

productivilty of capital. When the ratio is formulated OlL~J'~95-0kL~'9~5J5-LLL'9L8~O~-'~9L65LL~;~9~~O~~L'~'9~7~5-LL'~980


in terms of increments of fue variables rather than
Source. U S DepL 01 Commerce; Puerto Rico Planning Board
absolute levels, the measure is known as the incre-
mental capital/output ratio (ICOR), which can be in the calculations inc1udes the gro~s fixed capital
expressed as Ll.K/ Ll.GDP. The ICOR is the reciprocal of all sectors and of all types of capital in the
of the marginal physical produotivity of capital. '7 economy. Since the ICOR tends to be very sensitive
In prevailing capital theory, the addition of units tO' short-term swings in output, a moving average
of capital embodying the same technology is thought of fue ratio is frequently used in order to filter our
O'f as a deepening of capital, a process that implies excessiveIy erratie movement. A 4-year moving
a declining marginal productivity of the capital. average has been inc1uded in the graphs for this
Alternatively, if units of capital having innovative purpose. The moving average, however, did not re-
technology associated wifu them are added to the move theextreme turbulence in the ratio associated
produotion system, capital is s'aid [O' have "widened"; with ,fue recession.
with new technology, fue marginal productivity of As the data show, the Puerto Rican COR averaged
the capital would increase. Since capital deepening 2.50-2.55 over most oí the period of fue indus-
and widening can occur simultaneously, the net effect
on the marginal productivity of capital will depend Table 20.-Average CapitallOutput and Incremental
on the relative strength of the twO' influences. If CaPital/Output Ratios Puerto Rico, 1947_77 '
innovative technology is not sufficiently extensive
in the economy, even though it is present, the mar- Average Marginal
Capital! prouuctivity Incremental productivity
ginal productivity of capital will still decline as Output of gross capital/output of gros!
capital is added. Capital deepening fuus occurs in the Period ratio fixed capital ratio fixcd capital
net sense. 1947-63 2.50 .400 2.37 .422
1963-73 2.55 .392 3.28 _.305
The trends occurring in the PuertO' Rican COR 1973-77 3.01 .332 7.96 .126
and ICOR values since 1947 are presented in figure
1 Excepting the incremental ratio for 1973-7.'. the average rati?s
20 and table 20. The capital stock measure used were calculated by averaging the annual ratIos for the years ID
the period indicated. The incremental ratio for 1973-77 w~ calcu-
l1 Since technology and employment have shifted in reality as the lated from the respective capital and GDP changes spanmng the
COR and ICOR change, the corresponding productivity shifts entire perlod 1973-77 in order to avoid introducing negative and
(whether average DI marginal) can be interpreted onIy as approxima· extremely large yearly changes.
tions of changes in the productivity concepts taken in their theoreticaJ
sense in which technology and labor are assumed to be held fasto Source: U.S. Department of Cornmerce.

97
trialization. At the end of the sixties, however, the output unless more of the second factor was also
ratio began to inerease and averaged 3.01 in the used. The augmentation of capital with labor can
years of crisis and recovery, 1973-77. Aceordingly, serve a dual policy purpose in that more of the un-
the average productivity of capital was nearly stable employed can be put to work while simultaneously
for almos! two and a half decades, but its yearly helping to boost the rate of return on capital.
average in the 1973-77 period was 15.2 percent
below its prio~ average. ICOR, Investment Share, and the Rate of
The Puerto Rican ICOR gradually increased over Growth
the three decades after World War n, with a corres-
ponding downward trend in the marginal productivity Besides being a measure of capital efficiency, the
of capital. From 1947 to 1963 the ICOR averaged ICOR is a key variable that connects the investment
2.37, but between 1963 and 1973 the ratio was 3.28 share of !he production to !he rate of growth in the
on the average. The reciprocal values representing economy. The investment share and the rate of real
!he marginal produet were 0.422 and 0.305, re- growth are related by the following identity:
speetively, meaning that a decline oí about 28 per-
cent occurred between the averages of the periods. GDFI/GDP=ICORXgrowlh rate of GDP.
In the crisis and recovery years, 1973-77, the ICOR
average reached 7.96. The lalter measure was derived Each combination of an investment share and arate
by taking the changes of capital and output over the of growth of real GDP implies a corresponding value
span of the entire perlod in order to avoid the drastic for the ICOR. The ICOR values implied by the in-
swings due to the recession shifts. The percentage vestment shares and rates of economic growth in
decline of !he corresponding marginal productivity Puerto Rico for each of the post-World War JI years
was about 59 percent from the 1963-73 average. are plotted in figure 21. Table 21 presents average
values for the Ihree perlods of analysis. As Ihe graph
The recently recorded ICOR value of 7.96 is
shows, except for the years 1974-77, the ICOR is
probably not fully comparable to the ratios for the
largely a mirror image of the real GDP growlh rateo
earlier periods since the unemployment rate was dis-
tinctively higher and the capacity utilization rate Since the GDFI does not exactly equal the change
lower in the economy in the 1973-77 period than in in the gross fixed capital stock in any year, due to
prior periods. Between 1973 and 1977 Puerto Rican
unemployment averaged about 16 percent, compared Figure 21
to 14 percent for the 1947-63 period and 12 percent Gross Domestic Fixed Investment Share,
Incremental Capital/Output Ratio and Growth of Gross
in the 1963-73 decade. Aceount should be made of Domestic Product Puerto Rico, 1948 77 M

!hese contrasting conditions between intervals. If lhe (Constant 1954 Dollars)

utilization of the capital is less than full, !he volume 30,--------------------------------,


of capital involved in the production process is
overslated and the average productivity and marginal
produotivity measures are consequently understated. 25 25

Capacity utilization information, however, is not


available for Puerto Rico; and unfortunately, the
unemployment rate cannot serve as an acceptable 20 20

proxy. Knowledge of Ihe unemployment conditions


can assist, nonetheless, in interpreting the" ICOR
values lor different production periods. 15 15

Even if capacity utilization data were available '"


~.
o
for Puerto Rico, however, a further complication 10
10
of analysis remains. That is the question of how the
rate 01 capacity utilization interacts with the employ-
ment level in its impact on !he COR and the ICOR.
The augmentation of capital wilh labor would be
expected to increase the average and marginal prod-
ucts 01 the capital unless the produetion techniques
has fixed capital/labor relationships over various
ranges of output. In peculiar circumstances, negative
productivity effects may even occur. If fixed input .5~~~~~~~~~~~~LL-'"L'"roLLL-'~.~~U
requirements prevail in the production system, the 1945 1950 1955 1960 1965 1970 1975 1980

addition of one input to the other would not increase Sou'ce. U S Depl of Commetoe; PuMO Rico Plannir.g 6<lard

98
Table 21.-Implicit Incremental CaPitallOutput rate of return on capital, the COR and ICOR meas-
Ratio (ICOR) Puerto Rico, 1948-77' ures made directly from the capital stock estimates,
Average Average
and the indirect ICOR estimates made via the
rate of share oí Average growth-investment share identity-give the impres-
real growth real GDFI¡ implicit
inGDP GDP ICOR sion of a somewhat dec1ining efficiency over the two-
Perlad
and a half decades after 1947, followed by an ex-
(%) (%) Value aggerated deterloration of efficiency during the crisis
1948..-62 ------------ 6.44 18.33 3.28
---------------_. 7.67 25.16 3.71 and recovery years.
1963-73
1974-77 ----------- l.n 18.32 10.98

I With the exception oí the average ICOR for tbe period 1974-77,
Future Growth and Investment
a11 tabulated entries are arithmetic averages of yearly values-
occurring within the designated periods. The average ICOR for The relationship between past GDPI/GDP shares
1974-77 was calculated by using the interval average cited in the
table for the growth rate of the real gross domestic product and
and the rate of real growth of Puerto Rican GDP
the average investment share. Tbis alternative method was used to can serve as a guideline for projecting future per-
avoid averaging in negative ICOR values which resulted in 1974
and 1975.
formance ofthe economy. It will be recalled that one
Source: U.S. Department oí Commerce; Puerto Rico Planning of the major issues outlined at the outset of this
Board. report was the question whether Puerto Rico could
resume real econamic growth at rates similar to prior
the fact that the discards are not accounted for, an experience under Operation Bootstrap. It was indi-
implicit ICOR value derived from the identity in- cated that no apparent barriers to a return to accept-
troduced will not correspond exactly to the ICOR able, although moderated, growth rates seemed on
found by direct calcubtion from the capital stock the horizon. However, knowledge of the size of the
increments. The relative changes of the imp!icit ICOR can give an impression that future growth rates
ICOR using the GDFI should tend to approximate of GDP would seem wilhin the limits of the invest-
the pereentage changes of the directIy calculated ment rea!ities. It is possible that change in technology
ICOR. Sinee our interest in lhe analysis centers on could bring abaut significant ICOR changes in the
the evidence of capital deepening the behavior of the future. Evidence seems to indicate that higher cosls
implicit ICOR is of some assistance. of energy have already pressed production mixes 10-
Table 21 shows that the average of the imp!icit wards greater relative labor content in a number of
ICOR values for Puerto Rico for the period 1963-73 industries, both on the maiuland and abroad. Because
was about 13 percent higher than the average for the of various conceivable combinations of this sort,
perlod; however, 1948-62 the ICOR varied consid- postulating future ICOR values has its risks. How-
erably within each of the periods. The ICOR average ever, on the basis of physical trends, capital deepen-
hetween 1974 and 1977 was three times the averages ing of some extent that can be interpreted from the
of the other two perlads shown. The 10.98 value for previous evidence as having occurred in the past
the very recent period is derived by taking the incre- might reasonably be assumed to continue. Secondly,
ments of output and capital occurring across the a simple ca1culation of the GDPI/GDP shares com-
entire span of years 1974-77. Changes are taken patible with various combinations of ICOR's and
across the span of years and avera,~ed by the years, real GDP growth rates can serve to suggest at least
the value is 8.17, a value very close to the 7.96 the limits of future investment needs. The combina-
calculated directly earlier for the same periodo tions can also provide the growth potential once the
The average values foc the 1948-62 and the 1963- investment effect of the economy in terms of the
73 periods are larger than those ca1culated by the share of GDP is provided.
direct method; this is to be expected sinee the dis- Table 22 presents s",veral combinations of invest-
carded capital is not accounted for in ·the present ment shares and future growth rates for the Puerto
computation. The directIy calcÚlated ICOR values Rican economy. The values shown in the body of the
showed an increase of 38 'percent in the period aver- table are gross fixed investment shares that are com-
age between the 1947-63 and the 1963-73 periods. patible with the ICOR values and the GDP growth
The result conflicts with the 2-percent rise recorded rates appearing in the margins, allowiug for a 25-
in the average betweeu the same two periods by the pereent augmentation of the shares to account for
indirect method. The latter result would suggest that capital discards which must be deducted from the
capital dee¡ieuing was trivial between the two periods. investment. The values appearing in the table within
111e sharp change between the averages of the 1963- the confiues of the steplike boundary !ine aud the
73 and 1974-77 periods calculated by lhe indirect margins of the table are smaller shares than the maxi-
method appears to be more in !ine with the chauge mum 28 pereent GDPI/GDP share experienced by
observed in the direct calculation. Thus, all three Puerto Rico in 1970 and 1971. The first two ICOR
approaches to capital efficiency used in the analysis- values in the left-hand column were ca1culated di-

99
i
~
"
'1
Table 22.-lnvestment Shares, Incremental CaPital! of only 21 percent, Puerto Ricans could anticipate ar
Output Ratio, and Real Growth Rates for Puerto real GDP growth of between 5 and 6 percent ayear. ')
Rico 1
To attain lhis combination, !he GDFI/GDP share
Annual growth rate of real gross domestic product would have to be in the neighborhood of 25 percent,
Incremental 4.0 5.0 6.0 6.7 7.4
the average experienced in !he 1963-73 investment ';
8.0
capital/ expansiono If the ICOR could remain low at around
oulput Gross fixed domestic investment share of gross
ratio domestic product 3.5, a GDFI/GDP share of 20 percent, which would
approximate recent experience, could support a real
2.4 12.0 15.0 18.0 20.1 22.2 24.0
3.3 16.5 20.6 24.8 27.6 30.5
annual growth rate of GDP in excess of 5.5 percent.
33.0
4.0 20.0 25.0 30.0 33.5 37.0 40.0
The table can also be used to inler future expecta-
4.5 22.5 28.1 33.8 37.7 41.6 45.0 lions that seem unreasonable. The table shows, for
example, !hat if the economy were to regain the 7.4-
lInvestment shares include a 25-percent augmentation to
for discards. account percent average annual real growth rate 01 the 1963-
Source: U.S. Department oí Cornmerce.
73 period, the ICOR must be considerably reduced
by way of teehnological change or else an extraor-
rectly from the capital stock data and represent the dinary investment effort would be required. As an-
averages experienced in the 1947-63 and 1963-73 other Iimiting case, il the ICOR were to stay at
p~riods. The latter period's average is 38 percent 3.3-the average between 1963 and 1973-a 30.5-
hlgher than the former period's average. The values percent investment share would be required. At an
found in the third and fourth columns are the real ICOR value 01 4.0 a GDFI/GNP share 01 37.0
G~P gro:vth rates actually experienced in the prior percent is needed. The 30.5-percent share might
penods clted; hence, the share values fallina within possibly be within Puerto Rieo's grasp if high-Ievel
the described boundaries oi !he table could be called economie activity can be resumed with controllable
"historically feasible values." inflation. The 37.0-percent share, on the other hand,
The highest ICOR value appearing in the table would appear to be weII beyond any reasonable
the. value 4.5, was derived by applying to the 3.3 expectation.
ralIo the same 38-percent historical increase that Another measure of the growth potential can be
occurred in the ICOR average between the 1947-63 had by assuming that a given GDFI/GDP share-
period and the 1963-73 periodo This seems like a such as the 19 percent averaged in the crisis and
reasonable IimÍling increase to assume. It says, in recovery period (I973-77)-would continue. Then,
es~ence, that technologieal change would proceed in
in order for real growth to be maintained at the 7.4-
thls decade as it had in the previous, with a net percent historic average annual rate of the 1963-73
deepening of capital of the same degree resulting. In expansion, the ICOR must be 2.7-a sÍluation im-
o~der to have 5-percent real GDP growth per year
plying innovative changes 01 significan ce.
wlth an ICOR oi 4.5 the investment share would Innovative changes, of course, are the ultimate
have to be 22.7 percent. Allowing for a 25-percent sanrce of real economic growth. With such progress
augmentation for discards, the GDFI/GDP share the ICOR can be reduced and the marginal physical
would be inflated to 28.1 percent.I 8 This GDP share productivity 01 capital raised. It is possible then to
equals lhe maximum historie share sinee 1947. support laster growth with smaller investment shares.
According lo the combinations of variables tabled Production costs are also reduced, thus countering
it appears that, if capital deepening were less tha~ inflation of the kind arising from the cost base. Em-
~8 percent so that the future ICOR might be pro-
ployment demand is also increased with innovation.
Jected at 4.0 as a maximum for example-an increase AH o.f the results of innovation are desirable. Keeping
in mind that the Puerto Rican economy of the near
18 The annual change in the gross fixed ca!1ital stock of Puerto Rico future will operate within a world environment of
averaged ~bout 80 percent of the GDFI fram 1963 to 1973. the 20-
percent dlfference refiecting the proportion of discards. Using this inflation in which sustained economic growth be-
same proportion for the future, the investment share calculated from comes increasingly more difficult, innovation be-
the identity would have to be increased by 25 percent to convert the
share to a GDFI/share. comes even more salutary.

100
Chapter III.-External Trade
INTRODUCTION of 44 percent while the Dominican Republic and the
Netherlands Antilles had ratios near 30 percent.
Foreign trade has played an important role in the
industrial development of Puerto Rico's economy.
Puerto Rico has relied heavily on export growth to DIRECTIONS OF TRADE
provide the ímpetus for growth to the rest of the
economy. Imports of raw materials and intermediate There have been few changes in the direction of
products provided necessary inputs for Puerto Rican Puerto Rico's exports since the early 1950's. United
firms, while through exportation these firms were States has remained the major market for all of
able to find markets for their final products. Puerto Rico's industries. Dnring the 1950's nearly
One way to perceive the importance of foreign 95 percent of Puerto Rico's exports went to lhe main-
trade is to compare its relative importance with lhat land. This pat!em remained virtually nnchanged
of other components of gross product. The fignres in during most of the 1960's. In the last half ofthe
table 1 indicate that exports and imports have con- 1960's, however, Puerto Rico started to export more
tinually risen much fas ter than gross natíonal product. to Carribean countries, especially the Virgin Islands,
Exports during the 1950's were about 35 percent of and to some European conntries.
gross national product, and as industrial develop- The total dollar amount exported to the Virgin
ment continued through the 1960's exports grew to Islands dnring the 1960's about eqnaled the dollar
about 40 percent of gross national product, and in amount exported to all aforementioned conntries.
1977 this ratio reached nearly 57 percent. Merchan- Most of these exports were slúpped to countries near-
dise imports, on the other hand, equaled about 50 by-the Dominican Republic, the Netherlands An-
percent in 1955, and their share of gross national tilles, Venezuela, Jamaica, and the French Carribean
product remained nearly Hat through 1970. With the Islands. But the European market was ruso tested in
oil crisis of 1973-74 and Puerto Rico's heavy de- lhe late 1960's with most of the exports slúpped lO
pendence on imported oil, imports skyrocketed to 71 Great Britain and the Netherlands.
percent of gross product, and their share reached 77 In the 1970's the United States remained the major
percent in 1977. market, reeeiving about 85 pereent of Puerto Rico's
The level of the ratios is even more dramatic when exports (see table 2). The Carribean countries made
one compares them with other trade-oriented coun- up about 8 percent of the export market with the
tries. In -the Netherlands, one of the many trade- most important countries-the Virgin Islands, lhe
oriented countries of Enrope, exports equaled about Dominican Republie, and the Netherlands Antilles.
45 percent of gross national product in 1976, while Exports to the European market also grew substan-
economies of similar size to Puerto Rico, like the tially during this time. European countries led by
Dominican Republic and the Netherlands Antilles, Netherlands, Belgium and Luxembourg, and Franee
had ratios of 22 percent and 29 percent, respectively. purchased about 3 times more goods in 1976 than
On the import side, the N etherlands led with a ratio lhey did in 1970. The continents of Asia and Afriea

Table 1.-Exports, Imports, and Certain Components of Gross National Product


[Percentages of GNPl

1955 1960 1965 1970 1975 1976 1977

~~~~~ ~::~~~:~{~: ~ ~~==~:::::::=:==:=====:~-==


32.5 37.5 36.0 36.8 44.0 45.0 56.6
50.7 54.0 54.4 S3.S 71.0 72.8 77.3
Gross domestic fixed investment ~_.
________ _ 17.4 21.1 26.0 29.9 26.8 22.8 18.3
Government expenditures _....______________________________ _ 12.3 13.0 13.7 16.3 22.6 21.7 21.6
Consumer purchases of durabel commodities __ 9.1 10.5 11.2 12.8 11.9 13.9 14.9

Source: Puerto Rico Planning Board.

101
Table 2.-Top 10 Exporters to Puerto Rico in 1976 (Fiscal Years)
Ratio in Puerto Rico
Total Imports

1966 1970 1975 1976 1966 1976


IMillions of dollars] Percentages
1. United States __________ ._______ .___ ._____ ._______ .._~ _____ _ 1,356 1,963 3,004 3,389 81.7 62.4
2. Venezuela __ 0 _ 0 _ _ _ _ _ _ _ _ _ _ _ _ _ _ • _ _ _ _ _ _ _ _ _ • _ _ _ • _ _ _ _ . . _ _ _ _ _ _ _ _ . . __ . . ~._~ _ _ _ _
96 142 486 535 5.8 9.8
3. ]apan .. _______________________________________________ _ 31 74 129 153 1.8 2.8
4. Bah:nnas _________________________________________________________ _ 81 121 2.2
5. Libya __ ..".. ___ .. _______________________________ .. ____________ _ 22 97 1.8
6. Netherland Antilles _____________ ~ _____.___.______________. 14 36 123 88 0.8 1.6
7. 1ran ________________________..________ ._. __________________________________ _ 148 80 1.5
8. Saudi Arabia _____________________________._._.___._________.____________ _ 29 65 1.2
9. Algeria _... _. _____._________________________________.___________________ _ 106 61 1.1
10. Spain _______.____.________________________._____ __ . _______ _ ~
ID 35 56 58 0.6 1.0

Top 10 Impo,ters from Puerto Rico in 1976


Ratio in Puerto Rico
Total Exports

1966 1970 1975 1976 1966 1976

IMillions oí dolIars] Percentages


1. United States _____.___________.___________.____________________..________ __ 1,055 1,533 2,652 2,817 91.3 84.2
2. Virgin Islands __________________________.._. _______________ .__________. ____... 52 78 129 117 4.5 3.5
3. Netherlands ____ ._.. __ .______ _________________________.____.___ .______ ._. 7 31 32 86 0.6 2.6
4. Dominican Republic ____ .____________________.___.________________________. __ _ ID 17 55 40 0.8 1.2
5. Venezuela _____.__________.______.____________.___._____.______.___ ._ ._____________. 1 7 24 33 1.0
6. France ......__ .___________________ ._________.______.___.____._._____ _ 1 12 27 0.8
7. Netherland Antilles ____________________.___ ._. _______._.__________ _ 2 4 24 24 0.7
8. Belgium and Luxembourg _ ..._. __________________. __. ____ _ 7 16 20 0.6
9. Trinidad and 10. Tobago _________________._________.___ .__._. __ _ 1 1 24 14 0.4

Source: Puerto Rico Planning Board.

only purchased a small share of Puerto Rico's ex- Germany, began exporting a great deal more to
ports. In 1976, they purchased a total of $32 million Puerto Rico.
with main commodities being chemicals and electrical The Iast 7 years must be divided into two different
equipment. periods. From 1970 through 1973, there was hardly
The sources of imports have varied more than the any change iu the direction of imports. Because
destination of exports since 1950. The United States Puerto Rieo's appetite for oil was growiug much
remains the major exporter to Puerto Rico although faster than its demand for other commodities, oi!-
its share has dropped about 30 percent since 1950. exportiug nations were taking a Iarger share of the
In 1950, Puerto Rico received 90 percent of its im- import market. But the United States stiII supplied
ports from the United States. The other important about 75 percent of the island's imports. The second
trading countries were Canada, and Venezuela, from period is from 1974 to the present during which the
which Puerto Rico received most of its petroleum world was confronted with oi! price increases fram
imports. During the late 1950's and into the mid- $3 to over $13 per barre!. With Puerto Rico's heavy
1960's oil imports from Venezuela to Puerto Rico dependence on oil imports, this priC<l rise dramaticaI-
grew substantially reflecting the changes taking place Iy changed the structure of her imports. Oil imports
in the Puerto Rican economy. AIso in the 1960's, went from $230 million in 1973 to nearly $1 bilIion
many Eurapean countries led by Spain and West in 1974 (see table 3).

Table J.-Puerto Rico's Imports from OPEC Countries


lIn millions oí dollars]

Calendar year

1961 1968 1969 1970 1971 1972 1973 1974 1975 1976

Venezuela -----_. __._-----_._--_._-----_._-----------._-----------_ .. 108.9 116.7 128.5 143_9 178.4 219.4 191.2 516.1 511.8 556.0
Other ---_.- --_._----------_._-------------_._------._. __ .. -~---- 4.1 4.3 6.4 8.4 10.9 26.8 38.7 422.8 406_9 444.0

Total ---_._----------------_._--._-----..- - - - 113.0 121.0 134.9 152.3 189_3 246.2 229.9 938.9 918.7 1,000_0

Source: Puerto Rico Planning Board.

102
Venezuela remained the major exporter of oil to of $153 million in 1953 but dec1ined thereafter. In
puerto Rico but countries Iike Libya, Iran, Saudi 1977 sugar exports equaled only $74 million (see
Arabia, and AIgeria that did not even appear in table 4). Tbis decline in sugar exports refleots the
puerto Rico's trade account in the early 1970's be- changes that were taking place within the Puerto
carne sorne of the largest exporters to the island Rican economy, and the 700,000-ton drop in sugar
during lhis periodo The pattern changed so quickly production between 1960 and 1970 is an indication
that the United States, wbich held nearly 75 percent of the change.
of the import market in 1973 retained only 59 per- The shares of other traditional exports also have
cent 1 year later. In the first half of fiscal year 1978 dec1ined. Apparel maintained a relatively stab1e share
the picture remains the same with the mainland share of total exports, averaging most1y between 23 and 28
abant 60 percent of the import market and the OPEe percent between 1950 and 1977. Since 1973, ap-
countries holding 26 percent. parel exports have dec1ined continually to about 11
percent of total exports in 1977. Beverage and
COMPOSITION OF TRADE tobacco produots made up about 8 percent of total
exports during the 1950's and rose to an average of
The structure of Puerto Rico's exports has changed about 12 percent during the 1960's. Since 1971,
dramatically during the postwar period, an indica- however, their share also has fallen steadily and now
tion that considerable industrial development has stands at only 5 percent of total exports.
taken place. During the early 1950's sugar alone Puerto Rico's industrial deve10pment is reflected
accounted for over 50 percent of total exports; by in the rapid growth of manufactured goods during
1960 its share had declined to 24 percent, and sugar the postwar periodo In 1950, manufaotured goods
share in total exports declined continuously until in (exc1uding apparel) totaled abont 12 percent of ex-
1977, it accounted for only 2 percent. N ot on1y did ports. By 1960 manufactured goods made up about
its export share decline; !he ·absolute value of sugar 30 percent of total exports, and current1y these goods
exports also dec1ined, particularly during the late make up over 50 percent of total exports. The main
1960's. The value of sugar exports reached a peak industrial products are chemical and related products

Table 4.-By Commodity Category Export Trends (Fiscal Years)


Export value Component ratio
1966 1970 1975 1976 1977 1966 1970 1977

Millions of do1Ian; Percentages

Food and nv. anlmals -_._-. __ ._----------_._---._---------- 196.8 214,2 432.5 411.2 533.9 17.0 12.4 11.9

Fish ---------._--- --------------_.,----------------_._-------- 60.1 95.1 2515- 230.6 295.1 5.2 5.5 6.6
Sugar ------.-.------_ ... _----------_._------_._--"--_._-- 100.0 62.5 73.1 69.4 74.8 8.7 3.6 1.7
Beverages and Tobacco --_.-....•....._.--.------ 146.9 151.8 170.9 182.3 213.3 12.7 8.8 4.8

Beverages -_._---------_.---_._---------------------- 18.3 31.5 43.5 52.9 70.8 1.6 1.8 1.6
Tobacco ._.. _..._.. _-_. __._-------_._.__._---------------- 128.6 120.3 127.4 129.4 142.5 11.1 7.0 3.2
Mineral fueIs and lubrlcant and reIated
materlals -._._------------------------- 89.8 130.8 439.4 345.2 502.5 7.8 7.6 11.2
Petroleum products ....._--------------_.._----------- 85.9 129.5 435.6 342.7 497.1 7.4 7.5 11.0
Chemicals _.. _._----_.----_._----- --------------------_.- 75_2 233.5 790.4 1,187.2 1,533.2 6.5 13.5 34.2

Chemical elements and compounds -._.._------ 29.8 77.9 356.3 453.6 607.2 2.6 4.5 13.5
Medicinal and phannaceutical products _._.--- 30.9 107.9 278.9 361.6 492.7 2.7 6.2 11.0
Manufactured goods classified material -_._-------- 98.9 148.2 247.8 146.4 192.4 8.5 8.6 4.3
Textile products _.._... _._----------_._--------------- 17.5 54.8 115.9 23.3 47.8 1.5 3.2 1.1
Machinery and transport equlpment ----------- 110.3 193.9 322.0 287.7 532.0 9.5 11.2 11.5

Machinery (nonelecrnc) -----------~-------


19.5 29.7 98.9 58.3 106.3 1.7 1.7 2.4
Electric ---- _._------------------------------- 86.8 155.9 204.5 208.4 384.5 7.5 9.0 8.6
Transport ----_.----_._._---------- 4.0 8.3 18.6 21.0 40.2 0.3 0.5 0.9
l\fiscellaneous manufactured artides ---------- 389.4 577.7 642.4 667.7 870.9 33.7 33.4 19.4
Clothing ------------------- .._-_._------------ 255.8 387.8 349.5 342.6 430.2 22_1 22.4 9.4
Shoes 46.0 69.4 66.0 57.3 70.2 4.0 4.0 1.8
Professi:;-~_;¡---;~i~~tifi~----····-·------------
-----------------._-- 30.5 51.4 63.9 101.1 159.9 2.6 3.0 3.6

Source: Puerto Rico Planning Board.

103
and machinery and transport equipment, especially plies of oil or other natural resources. Therefore,
electrical machinery and parts. Puerto Rico mus! import almost all the necessary
Chemical products made up only 2 percent of total inputs for production. These imports were eight
exports during the 1950's; by the 1960's chemical times larger in 1970 than in 1950. This increase in
exports were growing at an annual rate of 26 percent. raw materials and intermediate goods was the result
Petrochemical, and medicinal and pharmaceutical of more emphasis placed on manufacturing in the
products made up most of the chemical exports. In later 1950's and 1960's, and is reflected in the
the 1970's with a strong worldwide demand for growth of manufacturing production to 42 percent
chemicals, these exports went from $233 million in of grass praduct by 1970 when it also generated 43
1970 to over $1.5 billion in 1977 and currently percent of total net income.
make up nearly one-third of Puerto Rico's exports. Since 1970 the dollar amount of these imports has
Machinery and transport equipment also showed nearly tripled in value. The 1973-74 price increase
periods of remarkable growth. Between 1947 and or oil is the major reason fOor this large increase. Oil
1952 there was very little production of machinery imports went from $338 million in 1973 to $1.6
and transport equipment on the island. By 1960, billion in 1977. Imports of raw materials and inter-
exports of these products totaled about $50 million. mediate gOoods excluding petroleum increased by
During the late 1960's the production oí a wide range $800 million sinee 1970. In the last few years
of electrical apparatus and telecommunications equip- Puerto Rico has reduced its appetite for oil and is
ment spearheaded the growth of this category of now importing about the same amount of oil as in
exports. Today, Puerto Rico exports over $500 mil- 1973.
lion of machinery and transp-Oort equipment with
about $400 million of these exports in the category IMPORT PROBLEMS
of electrical equipment. Puerto Rico is a small island with limited amounts
The import trends also reflect the changes in the of all productive resources, except labor, Those min-
Puerto Riean economy as industrialization proceeded. eraIs which are available are quickly being ex-
During the early years of the industrial development hausted.
effort, consumer goods accounted for about 50 per- The land is mostly rugged and wooded with few
cent of total imports, the food component making up areas fertile enough for agriculture. Internal capital
one-half of consumer goods (see tables 5 and 6). By formation is smalI. In sum, Puerto Rico has had to
1960, the consumer goods share had fallen to 40 depend on importing the neeessary capital, technol-
percent and they continued to decline slightly. By ogy, and raw materials to carry out the transfor-
1977, they accounted for about 35 percent of total mation fram an agriculturaI to a manufacturing
imports. economy.
Raw materials and intermediate goods totaled 44 An important factor in carrying Oout this transition
percent of imports in 1950 even though gross product was the attraction of foreign investment. Puerto Rico
of the manufacturing sector was only 15 percent of had to encourage investors to the island with various
total production. This share is very high mainly tax incentives, offering virtualIy completeIy tax-ex-
because Puerto Rico has virtually no domestic sup- empt status to almOos! all businesses that Iocated there.
Table 5.-Economic Classification of Merchandise Imports (Fiscal Years)
1955 1965 1970 1973 1974 1975 1976 1977

Millions of donan

Total .--------------------..._------,,-----------_.--------------------- 580.3 1,504.3 2,505.5 3,456.1 4,223.8 4,950.7 5,431.8 6,108.1
Consumer goods ----_ ...._--------_._-------_._----------_ ..._------- 272.0 536.2 846.2 1,461.2 1,481.8 1,602.8 1,965.1 2,163.1
Durable . ---_ .....•.._.- .._........_..._._ .... __ .-_... __ ........_...... 49.5 167,1 267.8 424.9 343.5 352,9 526.0 609.8
Automobiles -_._ .. _-_._.. .._...•.... ...__ ..._........ .....-.-
~

_ _ _ 14.6 58.9 102.8 213.0 131.3 122.2 230.1 268.0


Other durable goods .•........._..._..... _.._......_.... _._- 34.9 108.2 165.0 211.9 212.2 230.7 295.9 341.8
Nondurable ---.--.--._--.----_......... _... _.. _....... _- 222.5 369.1 578.4 1,036.3 1,138.4 1,249.9 1,439.1 1,553.3
_._ _._
Food .........•..__ ...... _..... --------_..__ ...... .. ... __. 127.1 200.0 306.8 621.6 712.3 787.3 902.0 984.2
Other nondurable goods ...................._......_..._- 95.4 169.1 226.1 419.3 441.2 482.2 546.7 579.6
Capital goods _ ... ..... __ .. _------- ----------- ..--- 53.3 144.0 308.2 314.7 248.8 299.5 325.9 333.1
¡¡"W materlals and intennediate goods 255.9 824.1 1,351.0 1,680.2 2,493.2 3,048.3 3,140.8 3,611.9

Percentages
Consumer goods __ .._.... _.. _...._........... _. __...._..__._..__ 46.9 35.6 33.8 42.3 35.1 32.4 36.2 35.4
Durables ........_. __ ........___........._ .. _______ 8.5 11.1 10.7 12.3 8.1 7.1 9.7 10.0
Nondurables ___.___........................_____._______ ~_ 38.4 24.5 23.1 30_0 27.0 25.3 26.5 25.4
Capital goods __ .. ___._______ .__________________ 9.2 9.6 12.3 9.1 5.9 6.0 6.0 5.5
Raw materiaIs and intennediate goods _______ .__ 43.9 54.8 53.9 48.6 59.0 61.6 57.8 59.1
Total .___________ ._. _________________..____. ___.....____ ....._...._.__ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Puerto Rico Planning Board.

104
Table 6.-By Commodity Category lmport Trends (Fiscal Years)
Import value (millions oí dolIars) Percentages

1966 1970 1975 1976 1977 1966 1975 1977

Food and live animaIs _______.___ .____ .__ ~.. ______________ .______ 296.9 412.3 869.2 978.2 1,075.1 17.9 17.8 17.6
---------------------------------------
Meet and meat producís ____ .___.... _.. ____________ ~__ 180.4 122.9 217.7 280.9 293.9 10.8 4.4 4.8
Fruits and vegetables _______________________________________ 39.0 56.8 107.8 134.1 133.1 2.3 2.2 2.2

Mineral fuels and lubricants and related materiaIs __________________ 122.0 206.2 1,271.2 1,382.0 1,651.8 7.3 26.1 27.1
----------~----~--~-----------------
Petroleum products _____________________________________ 108.6 203.4 1,270.2 1,380.9 1,649.7 6.5 26.0 27.0

Chemicals ___ ._________ ._________ .____ ._._.. ____ .___ ..~_____ 102.5 151.1 363.8 425.5 549.4 6.2 7.4 9.0
---------------------------------------
Organic ..__ .. _________ . __________ .___ .__ .. __ ._.... _.. ___ .... _._.. _ ... _._ .. _.. _._ .. __ 8.3 11.4 95.8 104.3 146.3 0.5 1.9 2.4
Medicinal and pharmaceutical producís ____.__________ 23.0 28.4 93.7 87.2 118.9 1.4 1.9 1.9

Manufactured goods classified by material _._________________ 423.1 649.9 966.4 987.9 1,012.0 25.5 19.8 16.6
Paper products _.________________________________________________
---------------------------------------
42_3 67.9 166.7 177.8 186.0 2.5 3.4 3.0
Textile fabrics _. ________ .______ .________________________________________ 160.7 214.6 231.5 282.1 288.2 9.7 4.7 4.7
Iron and steel and other metals ___________________________ .__ 105.9 194.1 301.1 249.6 279.7 6.4 6.2 4.6

MacWnery and transport equípment ________ .._________ .___ ._.. ____ . ____ .. ____ .____ 336.0 613.0 684.3 858.5 918.9 20.2 14.0 15.1
Machinery (nonelectric)
---------------------------------------
_____________________________ .__ . _______. _ _ _ 115.7 261.5 240.5 247,4 229.4 7.0 4.9 3.8
Electrical ________________________________ .__________________________ 86.8 146.5 229.8 274.0 290.0 5.2 4.7 4.8
Transport .___._______ .. __ .____________________ ._______ 133.4 205.0 213.8 337.0 399.5 8.0 4.4 6.5

MisceIlaneous manufactured articles .__________ .______________________ 234.2 295.8 435.8 487.7 514.3 14.1 8.9 8.4
Clothing __________... _. _____ ... ________________________________________________ ---------------------------------
76.5 85.0 87.0 91.0 103.8 4.6 1.8 1.7
Shoes ____________.. __________________________________________________________________ 24.7 43.5 50.7 71.0 64.3 1.5 1.0 1.0
Professional, scientific and controllíng instruments __________ ._________ 31.4 44.1 54.5 63.7 62.8 1.9 1.1 1.0

Source: Puerto Rico Planning Board.

When the industrialization process was in full Table 7.-FOTeign Direct lnvestment in Puerto Rico
gear, foreign direct investment played a major role,
Foreign direct
making up about one-third of lhe gross fixed invest- investmentl
ment on the island (see !table 7). A large part of the Foreign direct
investment
gross fixed
domestic
fnnds come from the mainland, when many U.S. (millions of investment
lirms fonnd it attractive to locate in Puerto Rico, Fiscal years dollars) (percentage)

avoiding the high tax rates on the mainland and still 1947 ____________________ ._. ______. _____. ___________ _ 10.0 16.2
1948 _____________________________________ _ 0.5 .5
having duty-1'ree access to the U.S. market. Prior to 1949 __ .__________... ______._._________ _ 7.0 6.0
the recession of 1974-75, foreign investment con- 1950 _________________________________________ _
11.2 10.1
1951 __________ ._._._. ______ . ________ _ 20.9 16.7
tinued to fiow at an increasing rate,and in 1972 its 1952 _______________________________________ _
17.3 11.5
1953 __ .. _________________ _
share of gross fixed investment was about 48 percent. 1954 ___ ._______________. ____ .___._____ _
19.2 12.1
30.1 17.4
In 1973 and 1974, however, capital investment fell 1955 ___ ._______________________._______ . ______ _ 41.9 20.7
1956 __________________ . _____________ _
sharply refiecting the recession in the United States. 1957 __ ... _. __________ ~ ______________ _
57.1 26.3
59.5 22.9
With the United States emerging from the recession 1958 _ .. ______________________________._ 101.4 36.0
1959 _ ... _____ . ______________ . _____________ _ 59.1 19.5
by early 1975, Puerto Rico experienced a heavy 1960 ________. __ . ___ ._... _______ .. ___________ _ 74.9 21.1
inflow of capital in fiscal year 1976. The close inte- 1961 ____________ . _________________ . __
1962 ____________.__________________.________________ _
95.4 25.3
gration of the Puerto Rican economy wilh that of the 170.0 38.0
1963 169.6 34.9
1964 ________________ ._. _______ ._________ _
mainland is reflected by lhese movements of capital 176.3 30.2
1965 192.4 26.7
flows. Shifts in U.S. economic activity usually are 1966 225.0 30.2
transmitted quickly to the island, in this case, by a 1967 312.4 34.6
1968 283.5 29.4
slackening off of direct investment. 1969 ________________ . _____________________ . __ 369.5 33.7
1970 __. _______________. __________ _ 407.0 29.0
Another area in which Puerto Rico is heavily 1971 _________________ . ____ . ___ ._ .. ______ _ 680.2 42.7
dependent on imports is energy. Puerto Rico is nearly 1972 ___. __.______________________ . __.____ _
1973 _____________________._____________ _
836.8 47.5
540.7 33.7
entirely dependent on petroleum with virtually no 1974 _._~_~ _ _ ..........__ ~~_~_._.. 437.9 26.1
resources to satisfy its own internal needs. Prior to 1975 ___ .__ ._. ____________ . _________ _ 542.8 28.4
1976 ___________________________ .__ .. ______________ _ 11,178.0 69.5
the 1973 oi! embargo, Puerto Rico imported large
amounts of petroleum from nearby sources at a very 1 Preliminary.
low cost-about $2 per barre! in the early 1970's. Source: Puerto Rico Planning Board.

105
This abundant supply 001 cheap oi! induced the devel- Nondurable goods imports, which make up abant
Oopment 01 industries such as petroleum refineries and 75 percent of all consumer goods impOorted, have
petrochemical products. changed very slightly sinee 1950. The agricultural
The pricing policies of the OPEC nations over the sector has been unable to meet domestic food de-
past lew years have had dramatic consequences on mands. Puerto Rico imported nearIy 40 percent Df its
these and other industries. Sorne 155 plants have fOOod even when the economy was a traditional agri-
closed down between 1973 and 1975, and many cultural econOomy. Local farmers have been unable
firms that have stayed in operation have had their to compete with fOoreign suppliers to a large extent.
profit margins squeezed since they were able to pass The trend in durable goods imports refleets the
Oon Oonly part Oof the higher energy costs into prices. faet that manufacturing production has been oriented
The Commonwealth Oil Refining Company, Puerto tOoward the expOort market rather than toward domes-
Rico's largest privatebusiness, has recently filed lor tic consumption. In 1950, roughly 40 percent Oof all
protection under chapter 11 001 the Federal bank- durable goods cOonsumed carne from foreign sOources.
ruptcy law. In 1977, slightly more than half of the tatal dolIar
Puerto Rico currently imports over 100 million amount spent Oon durable gOoods went to foreign sup-
barreIs of oil ayear, but 40 percent 001 this energy is pliers. Automobiles are impOorted exclusive1y. Prior
reexported after refining. Oil imports have slowed to 1975, payments to foreign suppliers of automobiles
considerably since the oil embargo 011973, but their comprised 60 percent of total expenditures on auto-
dollar cost has skyrocketed. Oi! imports in 1973 cost mobiles. The other 40 percent went to local dealer-
nearIy $400 million, but in the following year Puerto ships in the form DI markups and excise taxes paid
Rico's oi! bill went to more than $1 billion. This large Oon automOobiles. In 1976, automobile imports equaled
diversion 01 income has had a negative influence on almost 80 percent of total purchases. The large rise
the economy over the past few years. from 197 5 to 1976 ean be partly aseribed to the
The data for 1977, indicate that real growth 01 large inerease in motor vehicle inventories that took
gross national product was up substantially and the plaee at the retail and wholesale level-a total 01
level of employment in manufacturing is. approaching about $80 milliDn. The ehange in the excise tax on
its peak level of 1974. If future price hikes by OPEC imported automobiles enacted Oon Augnst 1, 1975
countries are mOodest, lurther disruptions from energy (for FY 1976) also contributed to the large rise in
costs wilI be avoided. As IDng as Puerto Rico remains imports relative to tOotal purehases.
dependent Oon foreign oil, however, the stability of its
econOomy wiII depend significantly Dn the pricing Sorne estimates were calculated Df the income
policies of the oil-supplying nations. elasticity al demand for the imports in Pnerto Rico
Imported consumer goods account for a consider- (see table 9). TOotal imports and those or eertain types
able portion Oof total consumption (see table 8). In Oof eommOodities were regressed against real Puerto
the earIy 1950's when Puerto Rico was an agricul- Rican dispOosable ineome, and a priee variable (the
tural economy, imports of cOonsumer goods made up ratio of dOomestic priees versue import priees).
abDut 37 percent Oof aII gOoods consumed Dn the island. The elasticity Df tOotal impOorts with respect to real
As the industrialization process got under way, im- disposable ineOome was estimated tOo be 1.14 (i.e., a
ports of COonsumer goods varied only slightly in rela- l-pereent inerease in real Puerto Rican dispOosable
tion to total cOonsumption. At present, after almost ineome results in a rise of more than 1 pereent in
three decades of emphasis on the manufacturing real tOotal imports). This elasticity reflects the fae!
sector, dependency on imported consumer goods that impOorts are very important to the Puerto Rican
remains. Consumer goods imports make up nearly economy. AIso this relationship telIs govemment
40 percent of the durable and nondurable com- officials that tax measures tOo inerease income or busi-
modities purchased on the island. ness aetivity will have limited muItiplier effects be-

Table 8.-Shares ai Imparts Within Majar Categories oi Consumer Goads


[In percentagesJ

1950 1955 1960 1965 1970 1975 1976 1977


Consumer goods:
Total ____________________________________________ ~________________________ 36.7 36_0 39_0
::19.4 37.4 36.0 37.4 39.1
DUrables _______________________________________________________________________ 41.1 47.7 45.0 44.4
53.9 41.3 50.7 51.7
AutomobiIes ______________________~________________________________________ 52.3 60.1 66.3 62.9 56.8 74.8
58.7 79.7
Electric app1iances __________________________________ ~_______________ 41.0 63.9 57.1 67.6 66.6 54.3 52.6 59.8
Nondurables _________________________________________________________ 36.1 38.0 35.7 31.3 30.1 36.4 36.0 35.5
Food ___________________________________________ ____________ ___
~ ~ ~___________ 37.4 37_0
39.5 34.0 35.9 47.4 45.0 45.5
A1coholic beverages and tobacco products ________________ 17.8 13.8 11.6 12.3 13.9 14.7 14.9 16.4

Source: Puerto Rico Planning Board.

106
Table 9.-Rer;ressions of Puerto Rican Imports on Disposable Income and Relative Prices, 1950-77
lIn 1954 dollars]

Durbin
Elasticity of- With respect to- Constant term Elasticity R-Squared Watson

puerto Rican imports __ ~ _____._____________ Puerto Rican disposable income _______ _ -6.08 1.14 .994 1.84
1(-31.35) 1(44.07)
Price (puerto Rican deftator for PCE 2(Puerto 0.63
Rican defiator for imports) .1 (3.92)

puerto rucan imports oí foad ___________ Puerto Rican disposable income ____________ _ ~7.56 1.12 .969 1.83
1(-3.86) 1(4.53)
Price (Puerto Rican deflator for food/U.S. deflator -0.60
for foad 3) 1(-1.53)

Puerto rucan imports oí nondurable goods __ Puerto rucan disposable income ._____________ -5.37 0.94 .985 1-93
'(-6.44) , (8.61)
Price (Puerto Rican deflator for nondurable goodsl -0-04
U.S. defiator for nondurable goods 3) 1(_.25)

Puerto Rican imports of durable goods _____ Puerto Rican disposable income ______________ _ -11041 1.63 _976 1.96
l(-17_84) '(15.50)
Price (Puerto Rican deflator for durable goods/ -1.01
U.S. deflator for durable goods 3 1(-0.72)

1 t-Statistic.
2 Puerto Rican Deflator for Personal Consumption Expenditures_
3 1972 base_

Source: Puerto Rican Income and Product Accounts and U_S_ National Income Accounts.

caUSe of the large "Ieakage" through the import ers' food basket has probably ehanged to inc1ude
sector. more luxury food items, a 1arge part of whieh must
The high income ela~icity for durable goods im- be imported. Furthermore, growth in the tourist in-
ports may be in part explalned by the faet that dnr- dustry would also contribute to a high dependency
able goods make up a rising share of GNP at ineome on foreign food products, sinee this industry mos!
levels prevailing in Puerto Rico, aud there are few likely serves a high proportion of the Iuxury food
durable goods of high quality produced ou the island. items consumed on the isIand. In sum, -lhe income
Local residents prefer to purchase a brand name elasticities estÍmated are supported by other data.
produet prodnced on the mainland oYera similar
locally made product beeause the former has the Table 10.-Puerto Rico's Exports to the United States
better reputation for quality and dnrability.
Unless local production improves or international Exports of
Merchandise manufactured
firms locate faetories in Puerto Rico, durable goods Merchandise exports to goods to
imports will continue to be preferred. exports United States United States
Fiscal year (millions) (peroentage) (millions)
The elasticity for food and nondurable imports
were estimated to be 1.12 and .94. These income 1950 -------------------- $ 242.5 96_8 $ 70.9
1951 ------------------- 278.9 91-2 81-5
elasticities are high and are eontrary to the faet that 1952 -------------------- 270_3 98.2 101.1
people spend dec1ining proportions of their incomes 1953 ------------------ 333.0 95.0 135.3
1954 --------------- 362.4 93-4 141.4
on essentÍal items as incomes rise. 1955 ------------------- 372.4 95.9 178.5
1956 ------------- 432.2 93.6 222.8
Given the reliance oí the Puerto Riean eeonomy 1957 ----------- 472_2 91-2 260.9
on the outside world, these elasticities do not appear 1958 --------------------- 487.0 90.8 274.4
1959 ---------------- 530.1 93.4 348.2
to be unrealistic. As shown earlier, foreign imports 1960 -------------------- 629.2 94-4 366.6
have become an increasing share of gross national 1961 ----------------- 692.5 95.5 435.0
1962 ---------------------- 769.6 94.2 471.3
producto Certalnly, a large part oí. the rise is due to 1963 ----------------- 865.3 92.7 476.8
the higher dollar value for oi! imports, but nonoil 1964 -------------------.- 938.7 92.1 512.4
1965 ---------------- 996.6 91-4 538.3
imports make up a higher percentage of gross product 1966 ----------------- 1,172.9 90.0 647.2
than it did 30 years ago. The 1.12 ineome eIasticity 1967 ---------------- 1,346.9 87.1 745.2
1968 --------------------- 1,479.5 84.9 884.3
for food imports is eontrary to the fact that peopIe 1969 ------------------ 1,638.7 85.2 939.6
1970 ----------------- 1~729.3 88.7 1,0115
nsually will spend Iess of their ineome on food items 1971 ------------------ 1,796.8 88.3 1,061.8
as their ineome grows. But, as shown in this section 1972 ------------------ 1,974.3 88.3 1,137.3
1973 ----------------- 2,465.7 B8.5 1,468.7
the agrieultural ·seetor has been unable to meet do- 1974 ---------------- 3,338.7 85.1 1,852.6
rnestic food demand (the share of food imports to 1975 ------------- 3,138.4 84_6 1,654.7
1976 -------------- 3,346.2 84.2 1,886.5
total expenditures for food has risen from 37.4 per- 1977 ---------- 4,479.2 86.2 2,642.5
cent in 1950 to 455 percent in 1977). AIso, as in-
Source: U.S. Trade with Puerto Rico and Possessions,. Department
comes increased over the past 30 years, the consum- of Cornmerce.

107
EXPORT PROBLEMS it subject to the infiuence of fiuctuations in the main-
land economy. This dependency can be seen in the
The Puerto Rican industrial development has been high percentage of exports shipped to the United
primarily based on the export mark~t. Capital and States (see table 10, p. 107). In the early stages of
technology from the United States and petroleum development, production was totally oriented toward
from Venezuela facilitated the process. This combina- the United States. As the industrial development has
tion oí resources made it possible for Puerto Rico to proceeded, there has been sorne diversification in the
develop severa! industries on a large enough ,cale to direction of exports. Currently, Puerto Rico exports
generate substantial employment opportunities, raise about 86 percent of its goods to the mainland.
its standard of living, and complete the transforma- This close relationship between the mainland 'and
tion to a manufacturing economy. the island has enabled Puerto Rico to enioy faster
Development of the Puerto Rican economy along rates of growth than it could have achieved on its
these lines has led to a very high dependency on own. At present, Puerto Rico faces great difficulties
trade oriented toward the United States and has made in trying to maintain an adequate rate oí growth

Table 11.-Relative 8hares of United States Import Market of C"tain Commodities


[In percentages]

1965 1966 1967 1968 1%9 1970 1971 1972 1973 1974 I.975 1976

Textiles

Mexico -------_.. __
._------.----- ---_..._-_ .. _------- 2.4 3.4 3.0 1.9 1.7 2.3 1.6 2.1 3.3 4.8 4.7 3.5
Great Britain -" ------------------ 7.5 6.2 5.9 6.5 4.9 6.0 6.7 6.0 5.9 1.1 4.5 4.7
West Gennany .. ----------------._.--------_... _---------------- 2.2 2.9 3.5 4.3 5.2 11.1 12.7 9.5 7.1 4.9 5.0 4.1
BangIadesh .-------._---_.. _---- --_.._--._------------------------ 2.2 3.9 3.4 3.7 3.6
Hong Kong ----_.----------_. __ .. "--~--_._-_._-------------- 3.0 3.9 4.6 3.9 4.1 3.7 3.2 4.2 5.1 6.2 4.9 5.5
Italy -_..---------- .._---._---------------_ ..---------------- .._---------- --- 6.3 5.0 5.3 7.0 5.8 6.3 4.4 4.8 5.6 4.2 4.9 5.5
India _.._---------- --------_._--_ .._--------- ----------_._--------- 22.5 19.3 20.3 16.8 18.3 11.5 11.1 13.3 10.7 11.9 9.6 9.9
Japan _.._-_ ..._-------- --.-------------_... _----- 26.3 26.0 25.3 26.6 26.5 25.3 25.3 21.5 17.2 15.4 21.8 20.9
Taiwan ---_._-----_.-._-.---------_._--_._---_._-----_._-- .9 .9 .9 .9 .9 1.0 1.3 1.3 1.4 1.9 3.0 3.6
Puerto Rico -------_._-_._-_.-----_._--_._-----_.._------_...------- 3.9 3.8 3.8 4.9 5.1 4.7 4.3 7.0 10.1 9.6 2.1 1.4

CIothing

Hong Kong ------------_. __ ._---------- ---------_.._._-------.--.- 14.9 14.5 15.5 16.5 16.6 16.6 18.2 17.9 17.0 17.8 20.6 22.5
ItaIy -------_..-_ ... _.._----------_._---_._.----_ ...-------._.------_..--- 13.1 11.9 10.9 10.5 8.7 6.7 5.1 4.6 4.6 4.0 3.5 3.3
Korea ..._--_._-------- ----_._-_ .. _-----_._----_....._------_._--------- 1.4 1.6 3.0 5.1 6.4 7.2 9.7 10.5 9.6 10.6 13.4 16.6
Taiwan ----------. __ ... _--------_._-------_ .. -----------_..- 1.5 1.7 2.7 4.1 6.0 9.0 13.9 14.0 14.3 15.5 15.2 15.5
____ o

Japan ----------_..-. __ .---------_.--_._------_._----_.-._-_.------------ 17.8 19.3 17.0 15.7 17.4 16.9 15.0 13.4 9.7 6.7 5.3 5.3
Puerto Rico ---------_ .._-_ .... ---------------_.._-_.-------_._-_.._- 30.1 30.1 31.1 29.4 24.4 22.6 16.9 16.1 14.9 13.5 11.0 9.3

Shoes

Erazil _.. _._.---------_. __ .__ .__ .. _._._----- ----_.--_.------ 4.8 4.5 3.7 4.1 4.1 2.8 2.9 4.3 7.2 7.6 9.0 7.8
ItaIy ._----_.----_.__ ._---_.------------_._---- ..--_..-- -----_. .._- __ 27.2 31.5 31.9 38.6 38.4 38.1 35.3 34.9 31.8 26.9 24.8 19.1
Korea ---_._.... _----- ---------_._._-- .. _------ ----_._-_._--.--- 1.8 2.0 2.1 2.4 1.3 1.1 3.3 4.5 5.3 8.8 9.5 15.9
Taiwan -------------------- -----_._-_. __ .__._----_._-------_._-- 0.7 1.6 2.3 3.8 4.2 5.7 8.1 10.1 12.5 14.1 15.2 20.3
Spain ..---_.-_.-----_._---_..--_._---_..-----. __ .._--------..._-----_. 3.3 4.3 7.1 11.6 14.3 11.2 15.5 17.9 16.8 16.2 17.0 19.1
Puerto Rico .--.---_._------------_.- -----_ ...._..._-_..--.-------- 20.0 19.9 19.0 17.5 13.2 10.3 7.1 6.0 5.9 5.4 4.0 3.7

Chemicals

Canada ------_.--------------------_.--. -------_._._------- .._-_.--- 26.4 24.8 25.2 23.2 22.6 22.1 21.3 18.3 18.9 16.5 17.6 20.0
Great Britain ------------_.... _.-----------_._----------- 6.3 7.1 6.9 6.6 6.5 6.7 7.0 7.4 6.8 6.2 7.1 8.3
France ------- ---_.._._--_..---.---------_._---- ...__ ._--_.- 6.5 5.9 5.5 5.3 4.7 5.2 4.8 5.2 6.0 6.3 5.7 7.2
W"t Germany ------- ------_._----------------_._ ..---------- 10.6 12.1 11.8 13.5 12.8 11.6 12.9 12.7 12.2 11.1 9.6 9.6
Japan . _________ . ___________ . __________ .__.________________. 5.3 6.8 6.4 7.3 8.8 10.7 10.4 8.2 8.8 7.1
10.5 10.6
Puerto Rico ----_._--._-_._---------_._._-------------.--_._-- 6.7 7.6 10.1 9.4 10.1 11.4 13.4 16.0 16.7 13.4 17.8 18.5

Medicinal and pharmaceutical

Great Britain --_.--------------_._-------------------------_. 9.0 6.4 6.2 6.1 5.0 5.7 4.3 6.1 5.4 7.9 6.2 6.3
West Gennany -_. __._---_.---------------------_._--- 8.5 8.1 4.7 4.8 5.0 4.3 4.7 4.9 5.7 8.' 6.9 6.8
ltaly ---_.-.------_._--------.-----------. __ ..---_.----_._------------- 2.5 2.5 3.7 3.2 2.2 2.7 2.6 2.9 2.4 2.8 5.9 4.8
Japan .----_._--------.._--_..--_.---_. -------_.. _--------- 0.4 3.6 2.8 2.9 2.8 2.6 3.2 2.8 3.2 6.2 4.5 4.5
Puerto Rico ---_._------ --------_._-_.---._----------_._------ 30.5 38.5 45.8 47.2 48.4 55.6 58.2 60.4 62.4 48.3 54.6 54.8

Electrical machinery and equipment

Mexico -----_.. _.-------_._._------------------


" 0.5 0.8 2.3 3.5 4.4 5.4 6.9 8.3 10.9 11.2 9.3
W"t Gennany _._-_ .... _---._--_.----_._-------------- 6.8 6.2 6.2 5.7 4.8 4.9 5.3 5.2 5.6 5.5 5.9 4.4
Smgapore -------------------_. __._----------------- 0.4 1.4 2.6 4.1 5.6 5.5 5.1 4.6
Hong Kong .-----_. __ ._----------------_._-----_._- 4.5 6.0 5.8 5.7 6.2 5.9 5.3 6.0 6.0 6.3 5.2 5.0
__
Taiwan .. _-_. __..._-----_._--_. ._---_._----_._------------ 0.6 1.2 2.2 3.6 4.5 5.3 6.7 9.4 11.0 10.7 8.1 8.6
Japan --------_..-_._------_._----_._---------.-- .... _----_._._.-- 45.6 43.6 42.2 42.0 43_0 40.8 41.6 39.0 33.2 28.9 30.0 38.7
Puerto Rico ------------------------------- -------_._-----""--""- 9.3 7.9 7.1 6.6 6.2 5.6 6.0 5.2 4.9 3.2 3.1 3.2

Source: U.S. General Imports-World Ar'a by Cornmodity Groupings (FT 155); Puerto Rico Planning Board.

108
since some major expO'rt industries are experiencing increases in the minimum wage have notaffected this
deterioration in their cO'mpetitive positions. Higher industry seriO'usly;
O'il priees, inereases in the minimum wage, and high- (3) lhe major producers of these goods, besides
er fringe benefits have diminished the cO'mparative Puerto Rico, are U.S. plants where the tata! cost O'í
advantage that sO'me PuertO' Rican industries previ- prodnction is higher.
O'usly held. If Puerto Rico eontinues to reeeive duty-free aecess
Table 11 shows PuertO' Rico's share of certain
to the mainland market, medicinal and pharmaceuti-
United States import markets and alsO' those of O'ther
cal expO'rts should be able to maintain their share.
fO'reign cO'untries that dominate those markets. In The production of electrical machinery and equip-
cases where Pnerto Rico has lO'st ground, countries
ment has become a major part of the manufacturing
with very low wages have been the beneficiarles. process in Puerto Rico. This sector ,currently gen-
Textile exports have fallen from a high of $170
erates 6 percent 'Of the gross product 'and emplO'ys
miJlionand 10 percent of the U .S. import market in
about 13,000 people. Exports of electrical equipment
1973 to O'nly $48 million and a Jittle over 1 percent
have faced strong competitiO'n from fO'reign producers
O'f the import market in 1977. The factors causing
supplying the U.S. market even .though they rose
this shift are lhe higher energy costs and the recent
from $84 milJion in 1965 to over $380 miJlion in
rise in average hO'urly compensation stemming mO'st1y
1977. These exports comprised almost 10 percent
from increases in the minimum wage. Wages in
of lhe U.S. imports in 1965, but their share has
Puerto Rican textile industries are well aboye those
dec1ined since then to a level of only 3 percent in
in countries which are Puerto Rico's main competi-
1977.
IO'rs (see table 12).
A major factO'r causing this share decline has been
Table I2.-Average Hourly Earnings in Textile the cO'st O'f labO'r. Between 1966 and 1977, average
Industries hourly earnings in electrical equipment industries in
[In U.S. dollars for 1976]
Puerto Rico rO'se by 7 percent annually from $1.47
tO' $3.18. Mexico, Singapore, Hong Kong, and Tai-
wan, which have increased their share oí the U.S.
market for electrical equipment at the expense O'f the
i,land's equipment industry have average hourly
SOUIce: U.S. Department of Labor earnings well belO'w the level in Puerto Rico. Other
factors 'also have contributed 'lo the decline in their
Between 1950 and 1970, clothing andshoe exports share of the market suoh as petroleum prices and
made up O'ne-fourth to O'ne-third of total Puerto transportation costs.
Rican expO'rts. Apparel was one of the major items In general, export growth has been tied to the
exported during the 1950's and 1960's. Rising wages econO'mic activity of the mainland. Between 1950
and stiff competition from countries in East Asia and 1977, Puerto Rican rea! expO'rts increasedat an
have plagued these industries. In 1965, Puerto Rican annual average rate of 7 pereent. In only seven of
c10thing exports were 30 percent O'f United States ¡hO'se years has export growth been substantially
c10thing imports. In 1977, this share had fallen below below that leveL Those years were:
10 percent. Puerto Rico has lost its comparative Table lJ.-Annual G1'Owth Rate of Puerto Rican
advantage mainly tO' Koreaand Taiwan, where aver- Exports, Selected Years
age hourly wages are abont one-fifth of Puerto Rico's.
Shoe exports reflect the same picture. Fiscal year Percentage change
Puerto Rico chemical exports, primarily mediciual 1952 _ _____ ._______ . __ ._____ .____________ -7_3
1955 __ ___________________ .__ .... __________________________ .__ . 3_6
and pharmaceutical products, have increased their 1958 ___ __________ ._. __________ ._. _____________., .. ____ ._.________ 2.1
share O'f the United States import market. Puerto 1965 _. __ ._________ .... ________.____ . __ ._____________._________ .. _ 2_9
1970 ._____ ._.... _...____ .______________ .__ .________________________ 2.1
Rico's medicina! and pharmaceutica! products dom- 1975 ___ .________ ._. ____________ .. _______ .. ___ .___________ .__ .____ -18.4
inate U.S. impO'rts of such items. Their share had 1976 _. _________________ .__ ..__ .____________________ 0.4
risen as high as 62 percent in 1973, and currently
SourCe: Puerto Rico Planning Board.
these exports cO'mprise 55 percent O'f US. impO'rts.
The majar reasons for which Puerto Rico's medicinal
Five 'o-f thesebelow average grO'wth rates occurred
and pharmaceutica! exports have been able to main-
tain their share are: when the United States experienced a recession,
1954, 1958, 1970, and 1975. The similar patterns oí
(1) Petroleum is not a major input so the high oil growth indicate a close relationship between Puerto
prices have had Jittle impaet; Rican exports andthe Uuited States economy.
(2) this industry is capital intensive-Iabor inputs Another way to gage the relationship between
are a small percentage of total eost; thus the recent Puerto Rican exports and U.S. GNP is to measure

109
Table 14.-Elasticities 01 Puerto Rican Exports, 1950-77
Durblz¡...
Elasticity of- With respect te- Constant term Elasticity R-Squared Watson

-10.52
Puerto rucan exports (1972$) _ '(-40.07) .990 1.55
U.S. gross national product (1972$) ~_ _ _ __ 1.97
1(50.35)
Price ratio (P.R. implicit deflator for exports 1972 base) _. -0.71
(U.S. implicit deflator for GNP 1972 base) ~ _ _ _ _ _ 1(-3.61)

1 t-statistic.

the income elasticity of US. ímports from Puerto 'l'he marginal propensity of Americans to consume
Rico. Puerto Rican exports in 1972 dallar terms was esti-
Since the 1960's the growth in Puerto Rican mer- mated to be 0.04. Thus, a change of $1 billion in
chandise exports to the United States stems main1y U.S. GNP brings about a $40 million change in
from three commodity groups: pharmaceuticals Puerto Rican exports. Relating this change to the
(drugs), electrical equipment,and professional and output and employment multipliers estímated by the
scientific equipment. Many of the pharmaceutical
Puerto Rican Planuing Board for a change in ex-
preparations and sorne of the professional 'and scien-
tific equipment (mainly watches .and c1ocks) are in- ports, an increase of $40 million in exports would
come elastic. Thus, we believe that an income elas- bring about a $73.0 million rise in the island's gross
ticity of 2.0 for Puerto Rican exports to the Uuited product and create 4,700 new jobs.
States is consistent with the export data. As long 'as Puerto Rican exports are directed
The high elasticity is one indication that Puerto primarily to the United States, future growth pros-
Rican exports, and the island's economy as a whole, pects depend main1y on the mainland economy. If
is subjected to strong influence from cyclical fluctua- trading countries continue to lower their tariffs Puerto
tions of the mainland's economy. The Puerto Rican Rican exports may become price competitive in new
economy is extremely dependent on the U.S. econ-
foreign markets. Greater diversification of exports
omy for capital 'and for markets. The effects of
changes in economic activity on the mainland are would help to cushion Puerto Rico's economy against
quickly transmitted to Puerto Rico, mainly through the fiuctuations on the mainland. At present, how-
a rise or fall in exports, which then influences ever, Puerto Rico's export growth depends entirely
the fortunes ofother sectors of the Puerto Rican on the maintenance of the economic recovery in the
economy. United States. (See table 15.)

Table 15.-Regressions of Puerto Rican Exports on U.S. GNP and Relative Prices, 1950-77
Durbin~
Dependent variable Independent variable Constant term Coefficient R~Squared Watson
Puerto Rican exports (nominal dOllars) _____________________________________________ ~ ______________ ~ _____ _
-2,598.97 .991 1.86
1(-4_88)
U.S. GNP _._ ...._.._. __ .._._.~ __ ._.___ ...____ ... __. _...... ____ .. 0.00328
(nominal dOllars) _________________________________________ _ '(46.02)
Price ratio (Puerto Rican defiator for exports
1972 base) ____________________________________________ ___________________ _ ~
1,785.550
(U.S. GNP deflator 1972 base) ______________________________________ _ 1(3.33)
Puerto Rican exports (1972$) _________________________________________________ -8.67
'(-1.70) .983 1.73
U.S. GNP ...._ ..... _._ .._.. _. __ .___..._.. _ _ .....__ ....___ .. ___ _ 0.03885
(1972$) .. _.... _ .. ___ ._.. _..._~ __ .. _....._._~ ___ ... _ _ _ ... _._ '(25.85)
Price ratio (Puerto Rican deflator for exports
1972 base) __________________________________________________ _ -7_207
(U.S. GNP deflator 1972 base) __________________ ~_____ _ '(-1.40)

1. t-statistic_

110
Chapter IV.-Land, Mineral, and
Water Resources
Nature's endowment of resources and the develop- quality as well as quantity. The analysis is also
ment of their productive potential largely influence broken down by provinces. The discussion fnrther
the overall potential for productivity and growth in enumerates and comments on the various problems
an economy. Recognizing tMspoint the chapter that that Puerto Rico faces in its water development pro-
follows ls devoted to a comprehensive lasseSSl!l1ent oí grams which presently are guided by the Water Law
the land, mineral, and water resources of Puerto Rico of Puerto Rico (Public Law 136), passed in June
and weighs their avallabilities against their projected 1976.
future demands.
LAND
MainIy because of mountainous terrain, the land Introduction
area in Puerto Rico that is suitable for agriculture
aud for residential, commercial, and industrial de- The discussion in this section relates to the allo-
velopment is very limited and concentrated along cation of land in Puerto Rico. The section:
the coastline. The Puerto Ricau popnIation, conse-
quently, which even on an islandwide basis is very • Analyzes the trends in land use and land
values and renta! rates;
dense, is particularly dense inan area such as San
Juan. Under the pressures of population and general • Describes the strnctnre of land markets and
economic growth land values have risen decisively methods of land finance and transaction con-
in recent years and 'are expected to continue fue trend. trols, as well as the size distribution of land-
The chapter describes and analyzes these trends in holdings;and
respect to various types of land.
• Assesses the distribution of land useand at-
The discussion of Puerto Rico's mineral resources tempts to identify the issues arising from devia-
in the chapter points out that the island's availabilities tions between the directions of trends and
consist of apparently ample supplies of construction- policy goals.
type minerals-stone, cement, lime, c1ays, sand, and
gravel-rather than metallic deposits. There are only
modest amounts of metallic deposits and these have HistoricaI Distribution of Land Use and
very limited possibilities for commercialization. The Problems
most plentiful of the metallic mineral deposits are Topography, Population Density, and Productivo
found in the form oí copper. However, negotiations ity.-Puerto Rico is a rectangular shaped island
between the Puerto Rican Government and two min- about 35 miles wide and 100 miles long. The island
ing companies concerning possible exploitation of has an area abaut two-thirds the size of Connecticut.
the major deposits, carried on over several years, has Approximately 3.2 million people reside in the area,
been unsuccessfnl, due to disagreements over the meaning a density of nearly 1,000 persons per square
matter of revenue sharing. With regard to petroleum mile, which is abaut equivalent to that of N ew
and gas, very limited onshore testing has shown Jersey or Rhode Island. Puerto Rico's population is
no traces. The possibility that onshore and/or off- largely concentrated on the coastal fiatlands, where
shore deposits exist is sti1lsubject to verification. A four-fifths of the population lives. One-third of the
general metallogenic map of Puerto Rico appears total population is centered in the San Juan metro-
as an annex to this chapte!. politan area.
One of the contributions of the third section of Nearly 75 percent of the island is noncultivatable,
the chapter is a water budget analysis for Puerto mainly because of steep hillsides and mountainous
Rico and its surrounding islands. Water sources for terrain. One million acres are probably best suited
the economy are examined from the viewpoint of for grazing, forests, or wildlife. The soil of Puerto

111
Table 1.-Soil Survey Inventory
Unfavorable
Percentage Erosion Excess soil Climatic
of Puerto hazard water conditions limitation
Land reSOUTee description Total acres Rico (acres) (acres) (acres) (acres)

Class l-Suitable to all crops and uses. Few limitations, can be


cropped intensively ______ . 50,000 2.3
Class 2-Suitable to mast crops. Requi!es careful manage--
ment __ ___________.._._ .____________ ___ _
~ ~
162,000 7.4 50,000 51,000 61,000
Class 3-Limited choice of crops. Requires special coruervation
practice ________________~ _________. _ _ _ 217,000 9.9 135,000 36,000 43,000 3,000

Subtotal c1asses 1-3 __ ._______~ _________ .____~_


---------~--------------
429,000 19.6 185,000 87,000 104,000 3,000
Class 4-Severe crop limitations. Not suited to c1ean cultivation.
Tendency to low yields _______________________________ ,_ _1_57",:,0_00
_ _ _7_.2_ _ _1_19",:.0_00
_ _ _1",:2._00_0_ _ _2",:3'",:000
_ _ _4",:.00_0_
Subtotal classes 1-4 ______________~___________ 586,000 26.8 304,000 99,000 127,000 7,000
Class 6--Unsuited to cultivation. Use for pasture, range, forest,
or wildlife ~ _____ .~..____ ._ .._ ...___ ~.... _ _ _ _ _ ~_.. 362,000 284,000 2.000 76,000
Class 7-Unsuited to cultivation. Use for grazing, forest, or
wildlife _._._ ...._____ .........___.._ ..__.._~_._._._._._.... __ 1,089,000 49.9 594,000 7,000 488,000
Class 8-Unsuited to any agriculture. Use for recreation, wild~
life, water supply or esthetic purposes __ ......__ .._. ___._.___ 147,000 6.7 35,000 112,000
--~--------------~----~--------
Subtotal classes 6-8 _..___ .._.._...____ ..........___ ._...._..__.__ 1,598,000 73.2 878,000 44,000 676,000

Total .._._..____._..__......._.._~..~ _______ ...__ .._.


----------------------------------------
2,184,000 100.0 1,182,000 143,000 803,000 7,000
Percentage of Puerto Rico _.. __...___ .______ .._.. _ . __ .__._ 100 36 9 51.2

Rico consists of more than 350 identifiable types, more than haIf of the soil consisted of fragile soil
having considerable variation in productivity even types, has resulted in erosion, sedimentation of
though they frequently He very cIose to each other. water supplies, and loss of soil productivity.
The differences in soils result from varying climate, By 1830 Puerto Rico's seIf-sufficiency in timber
vegetation, relief, age, and parent material. products had been lost and their importation in-
The numerous soil types have been grouped into creased to the point where currentJy the island
eight productivity classes, the first three representing imports in excess of 90 percent of ils wood and
the mos! productive types in terms of cuItivated paper products. Although it has been reconunended
crops (see table 1). Less than 20 pereent of the over the last 25 years that between 200,000 and
island can be c1assified in these three groups, how- 400,000 'acres be set aside for the establishment of
ever. In terms of acreage, only 50,000 acres can be commercial forests, little has been done to reach
cuItivated intensively without concern for ensuing this goal. Reeently, the Department of Natural Re-
erosion, drainage, soil degeneracy or cIimate prob- sources has initiated a reforestation programo How-
lems. Another 150,000 acres can be used for crop ever, its magnitude is far below the aatual need, and
production, however, onIy when accompanied by it is no! oriented solely to commercial purposes.
substantial conservation measures designed lo avoid The land use pattern in Pnerto Rico has shifted
erosion, drainage, soil degeneracy, or c1imate prob- reeently toward a more productive aIlocation than
tility, or moderate c1imatic conditions. was foIlowed in earlier years. Tobacco and sugar
As figure 1 shows, the more productive soils are growing, for example, has left the mountains and
found on the 'perimeter ofthe island; henee, agricul- hilIsides, opening up 1.5 million acres for grazing
tural enterprises are located on the coastal flatlands and forestry. However, it seems that Puerto Rico
wilh substantialareas ofthe interior of the island may not be reaping the greatest benefits from the
being better devoted to grazing, tree crops, and transfer of production efforts since most of ·the aban-
forestry, as indicated in figure 2. doned lands are being left unmanaged with the
DecIining Importance of Agricnltural and Forestry result that brush and low-valued trees are taking
Uses.-The history of Puerto Rico revolves about overo
agriculture. As much as 90 percent of the island has Urban Sprawl.-Urban uses oi Puerto Rican land
been cropped despile the fact that only 30 percent are increasing at an accelerated pace. The urban
appears suitable for cultivation. The island originaIly sprawl rate is currently about 4,000 acres per year.
was totalIy forested, but increasing demands for The topography most desirable for building siles is
food, resulting from the Puerto Rican population also unfortunately thé most productive for crops
expansion, and fo~ export commodities led ,to mas'Sive (see figure 3. Furthermore, the major flood plain,
and systemic deforestation. TilIage of slopes where shown in figure 4, is largely limited to agricultura!

112
Rgure 1.
Land Capability Classes of Puerto Rico

3 3

~Culebra
3

~
c[) ~~ez
Mona

Note: See Table 1 For Deseription 01 Land Resouree elasses.

Figure 2.
Land Capability by General Agricultural Uses
_ General erops
Trees, Pasture
D Forest

113
Figure 3.
Urban Development Construction As Of 1975

_ Construction as 01 1975

;-

, .....• f\ • •
., '
-)l.Moca.
~

• ~Sin Sebastian

. ... ~ ...
• Lares
,." ~
JJIt
Utuado
~
Florida

'.
' .. ".Morovis
Ciares ~.


Corola!

.....
.....
.. ..Las Marias

., .. Jayuya
.,.
Orocovis
,,_
.. Comerio
-1' "'t.J

.• " o
....... .. ~as ...

.,.., '
"'" \ .Maricao Adjuntas
.. I • "'Barranq'ullas,:
" Cidr'a¿S Piedras
. . Humacao

\r . ..,:...
..
.. San'

,.., • Villalsa '


".. . .,. ...
,Aibonito
Cayey ..
Lorenzo •

~
San German
'!::!> \ .",
., .... / q o(l

"". '. - ~ Dewey


SasanatoGrande .... Yauco 6j~ana Diaz • 'Coamo r ,
c:::o lajas
• • • ,to" ...... ;
...,--~ .'- • •
'.

p

~
1,
Rgure 4.
Aoodable Areas

'i) •

.....
.....
u.

~~

p

~
Souree: United States Geologieal Survey
Table Z.-Net Lana Demand, Net Supply and Surplus or Deficit for Manufacturing in 1985, by Subregions
[In acres]

Manati
Agua- Vega
di1Ia Arecibo Caguas Cayey Fajardo Guayama Humacao Baja Mayaguez Ponee San Juan Total

Land supply _ _ .. _ _ 8,957 10,322 1,127 818 932 13,432 5,027 6,704 11,860 12,694 7,971 79,842
Land demand _ _ _ _ _ 2,071 4,357 2,024 558 538 5,968 3,221 3,160 3,426 8,923 12,432 46,678
Land surplus ________ 6,886 5,965 -897 260 394 7,464 1,806 3,544 8,434 3,771 -4,461 33,164

and recreational uses. With less than 30 percent implement. The Puerto Rico Planning Board would
oí the island having the better lands, competition be faced with the challenge of coordinating the future
for the more desirable areas is very keen. development of the island. However, the computer-
According to a study made in 1976 for the Puerto ized system for accessing aerial photography and
Rico Industrial Development Company (pRIDCO), land-use data prepared by the Puerto Rico Depart-
heavy demand pressures may be exerted on the ment of Natural Resources provides a helpful data
industrial lands of San Juan and Caguas by 1985, base to start from. AIso, the mapping and zoning
while other areas are expected to be much less in functions within the Planning Board should provide
demand (see table 2).' a framework for public guidance of long-term capital
The study provided population projections, esti- investment decisions in the private sector.
mates of manufacturing jobs in 2-digit SIC industries, A major element that must be considered in the
and a dispersion grid of jobs to subregions. A map allocation of land is real estate taxation. Common-
depioting the locationandextent of the industrial wealth real estate taxation policies affect industry
and urban areas oanticipated for 1985 appears in location and land use. In 1969, tax holidays of 10,
figure 5. 12, and 17 years were granted to firms locating in
The study points out that several additional prob- certain municipalities. The areas with higher un-
lems are likely to emerge as the Commonwealth employment rates were offered longer tax grace
attempts to balance future land supply with demando periods. In 1975, the tax holidays were revised, with
Several options for dealing with land condiJtions in the tax exemption periods specified for 10, 15, 25,
the next decade were outlined in the study men- and 30 years. Depending on the length of the plan-
tioned. ning horizon for business investment, an investor
can take advantage of the tax benefit by amortizing
(1) Move the industries to less congested areas. it over the entire grace period and then relocating
(This action would raise problems of lack of support in another area when the period lapses.
facilities and increased commuting).
(2) Move the people to new areas. (This action Squatters.-Poor housing, high unemployment,
would raise problems involving social and com- and large families, along with the presence of unused
munal life and costs of supplying schools, hospitals, or speculative land holdings, provide aclimate for
and other public faci1i ties.) squatting. Shanty towns can be constructed almost
(3) Change the industrial mix. (This action would overnight, and, once a family has established itself,
offer the opportunity to exchange light industry, with Puerto Rican law makes eviction extremely difficult.
possibly 40 jobs per acre, for heavy industry, with The overall extent of squatting is unknown. How-
possibly 3 jobs per acre. However, heavy industry ever, the Puerto Rico Land Authority estimates thal
is a large user of water and generates pollutants, about 2,000 acres have been squatted on in the last
thus limiting its location choices.) 10 years. Close surveillance in 1977 resulted in
(4) Satisfy only industrial demands. (This action only 25 acres being squatted on.
would create problems regarding needs for housing, Cornrnunities.-The high population density, an
recreational, commercial, agricultural, and olher efficient major road system, and the small size of the
uses.) island have contributed to a relatively unplanned
(5) Construct high-rise buildings for light industry. suburban environment which evolved along the high-
(This action would need further evaluation of the ways. Many homes are -the prirnary residence oí
building cests.) families. Other homes are vacation-type facilities for
(6) Satisfy only part of the industrial land use the wealthier urbanite. These "communities" have no
demands. (This action would raise problems with affiliated political entity other than the rural munid-
reducing the unemployment rate.) pality. The haphazard development of the cemmu-
None of the suggested options would be easy to nities lies beyond the zoning powers invested in the
Puerto Rice Planning Board, and the resulting chal-
1 The study was prepared by the Puerto Rico Management and
Economic Consultants, !nc. lenges to cemmunal esthetics are not unlike those

116
o

.,
1:
sc.
o
., .,,.
Lt:i -¡;

- Q

'"'" :m
¡¡:
-!!l
....
.5

117
associated with similar commercial developments
along the business arterials oí fthe mainland.
Furthermore, a problem arises in providing public
"od dti~ ,h001 d bo ""'oo, w ro p~l, "'''~ti" 1II
'od
so that they allow for redueed negative impaets on
land outside the urban area, provide greater efficieney
services to such strip developments due to the high in the installation and operation of publie services
costs of servicing. Transportation needs can be and facilities, and improve aceessibility by means 01 I
efficiently met to some degree, but most other com- private as well as mass public transportation. .
munity services are inefficiently provided unless they 2. Industrial Development.-Industries should be
are distributed over greater concentrations of business strategically located so that the land best suited for
establishments and residences. Lastly, using lands such purposes is used intensively, thus reducing the
adjacent to highways for residences may also draw conflict between competing goals .
• )fi areas which are highly productive for agriculture. 3. Agricultural Development.-Agricultural ac-
Abandoned Areas.-Reasons why a region with tivities should be developed on all efficient land so
high population density, high unemployment, and that Puerto Rico can produce a greater share of its
high land value may also have apparently aban- food consumption on its own while at the same time
doned areas can be offered. First, ·because land values maximizing rural-land use to promote the country's
have been rising steadily at about 10 percent per year development.
during the early 1970's (although somewhat less in 4. Flood Hazard Areas.-The loss of lives as well
the last few years,), hOilding unused land provides a as physical damage due to flood and wave action
nearly risk-free store of wealth, even in the less should be minimized. A policy is needed for identi-
attractive highlands. Second, the children of the fying and promoting land uses toward that goal.
owners of the larger coffee, tobacco, and sugar plan- 5. Infrastructure.-The infrastructure of the island
tations on the highlands left the fanns years ago for should be developed in a timely manner as an instrn-
schooling in town and stayed in the cities after ment of planning so as to organize and promote
obtaining professional and managerial positions. overall comprehensive development.
Their inheritance becomes a useful store of wealth, 6. Natural, Environmental, and Cultural Resource
even when there is little apparent incentive for active Areas.-The environment should be preserved and
use. protected by promoting the judicious use of allnat-
Clean Air and Water.-The constraints resulting ural, environmental, and cultural resources.
from the Environmental Protection Agency's regula- Urban Areas.-Although no land sales prices are
tions bear on land use, particularly by heavy industry. published in Puerto Rico, one source of indireot
Even though the island is small and the industrial land value data is the Department of the Treasury
pollutants can quickly be sent out to sea, their im- (Hacienda) which provides assessed values updated
pact while on land can be substantial. from 1958. The Department of the Treasury uses
The lack of sufficient modem water facilities sales contract prices which are recorded with the
also restricts land use. Industrial and residential water Section Oif Registry, Department of Justice, in its
users can easily outbid agricultural water users. Sub- assessment of taxes. The data are acquired at the
stantial irrigation is needed for developing vegetable municipality level and forwarded to the Departmenl
production and processing in the southwest comer of the Treasury. The estimates made from the as-
of the island. The lack of adequate sewer facilities sessed values, however, are inaecumte due to the
can cause contaminated water supplies. The latrines broad latitude in the ratio oí assessed value lo market
and septic systems used in the highlands, industrial value. The ratio ranges from one-half to two-thirds
wastes, agricultural processing effluents, and potential of Ihe market value. The wide latitude also ereates
mining runoff can affect both surface and under- a tax equity problem. A new official assessment 01
ground water supplies. real estate may be warranted in order to provide
more nearly equal tax treatment lor property owners.
Puerto Rico Land Use Goals Although the lack of direct sales price data makes
land values difficult to estimate, estimating urban
The Puerto Rican Planning Board has taken the
land values is especially difficult because of the coro-
first step toward making sorne major decisions about
plementary value of buildings and other improve-
the utilization of land resources in Puerto Rico. The
ments associated with urban land. Sorne notion 01
June 1977 Land Use Element Summary Statement
urban land values in Puerto Rico can be sensed
provides a broad overview of the poliey development,
from a sample 01 lot values for different areas oí
implementation, and eoordination proeess. It also
San Juan analyzed by the Department of the Treas-
outlines six major components of a eomprehensive
ury. The sample showed beach area properties having
land use poliey as follows:
values of $60 to $80 per square meter, while resi-
1. Urban Development.-Communities, towns, dential properties were valued from $25 to $50 per

118
square meter. The residential lot sizes varied from Size of Private Holdings.-Prior to 1941, private
300 to 500 square meters, or .08 acre to .20 acre. 1andho1dings in Puerto Rico were very concentrated,
private real estate researchers have found very few about 170,000 acres being he1d by four mainIand
developments on the overall island wifu lot values sugar corporations. The Land Reforro Law of 1941,
less than $15 per square meter. Residential proper- however, restricted private 1andho1dings to 1ess than
ties appeared to fa1l generally in fue $35,000 to 500 acres. The 1aw made way for ,¡he u1timate dis-
$70,000 range. Few properties sold for prices be- mantIing of the p1antation agriculture system and
tween $20,000 and $25,000. provided for the satisfactory compensation of the
1andho1dings that bad been distributed. In the
Rural Locations.-According to fue Puerto Rican ear1y 1970's, one of fue 1ast of the 1arge holdings-
Department of the Treasury estimates of real estate one comprising 13,000 acres owned by the Aquire
market va1ues for island coastal properties range Company-was parce1ed out.
from $8,000 per acre in the southwest to $80,000 Tbe diverted lands have been distributed under
per acre (about $20 per square meter) near San Juan. tbree Cornmonwea1fu programs:
Most of fue coastline lands are valued at $15,000
($3.70 per square meter) to $30,000 per acre, (1) Title N which coordinates large "propor-
whereas highland agricultural lands are valued as tional profit" farms engaged in sugar production into
low as $1,200 to $2,000 per acre. However, where a cooperative venture. The 1974 AgricnItural Cen-
compBtition for land intensifies among coromercial sus sbowed that 86 percent of farros were individual
and industrial firros, land value increases substan- proprietorships, whose owners have exchange rights
tially. Considerable acreage surrounding San Juan, as well as userights;
for instance, sells at prices ranging from $8,000 to (2) Title V which allots small lots (parcelas) to
$15,000 per acre. Actual sales prices recorded with landless laborers for homes and gardens; and
the Federal Land Bank He within the ranges cited. (3) Title VI which estabHshes use rights (usufrac-
tuario) for small private farmers on p10ts consisting
Structure of Puerto Rican Land Markets of 5 to 25 acres.

Land use in Puerto Rico is subject to public regu- Size of Pnblic Holdings.-The Puerto Rico Land
lation and seeming1y will continue to be. The Puerto Autbority is the largest landowner on fue island,
Rico Planning Board presently issues land-use per- operating nearIy 95,000 acres oí the best agricultural
mits and controls zoning. Because of insufficient l¡¡nds availab1e. The Autbority has allocated nearly
personnel for regulation and the high priority as- 45,000 acres for sugar production and 4,000 acres
signed to areas contiguous lo major urban centers, for pineapples. About 28,000 acres are presentIy
effective land control is visible 1arge1y on1y in the leased to individual farroers and around 15,000 acres
metropolitan communities. are involved in conservation programs. By controlling
these acreages, tbe Commonwealth effects a sub-
Financing and Transactions.-The financing of stantial leverage on the choice oí the agricultural
property purchases comes from a spectrum of commodities that are produced. Leased 1ands are
sonrces: Families, private banks, credit unions, the 1eased at very low rates. Most rents on these 1ands
Commonwealth Housing Bank, Federal Housing range frorn $1 per acre to $40 per acre. The rents
Administration (FHA) , Veterans Administration usual1y just cover taxes. Comparable rents on private
(VA), Federal Land Bank, Agricultural Credit Cor- lands are $30 to $40 per acre.
poration, Farro Home Administration (FmHA),and The present Commonwealfu Administration is
the Small Business Administration (SBA). The larger seriously attempting to improve agricultural produc-
banks have access to mortgage credit markets on tivity. Under plans now implemented, new contracts
tbe main1and. Some banks have direct affiliations for lands on the N orth Coast wbicb are suitable for
with offis1and banking interests. Few banks have fue rice growing, beef raising, and dairying will rent at
expertise needed to hand1e agriculture 10ans, how- $40 per acre in the first 3 years of the lease, $45
ever; most banks, consequentIy, prefer to' direct their per acre for fue following 2 years, and $55 per acre
lending toward the commercial and industrial loan tbereafter. Rents on the vegetable-growing 1ands of
markets. The Bank of America and Chase Man- the South Coast will be $50, $70, and $90 per acre
hattan Bank presentIy extend the bulk of agricultura1 for the same periods, respectively. Tbe rents are
loans made in Puerto Rico. The Bank of America signficantly higher tban past levels but are extremely
bas ample experience in making agricultural 10ans low in comparison to the returns tha! can be de-
and significantIy supp1ements the lending done by rived from bigh-yielding, well-managed farro opera-
the Federal Land Bank and fue Agricultural Credit tions. The Department of AgricnIture in Puerto Rico
Corporation. hopes that the 10ng-terrn leases will provide sufficient

119
incentives to shift production into more profitable poor investments. It does mean that the selection 01
areas. industries for Puerto Rico has important impact on
The second largest public landholder is the Puerto employment, land use, and the overall contribution
Rico Land Administration. At one time it held over to the island's econornic well-being.
55,000 acres, but it eventually sold off more than
Apprenhensions Regarding Self-Sufficiency._
18,000 acres for low-income housing and other
Rather than adopting policies which are designed to
private enterprises. Of the remaining acreage, about
hasten the economy towards self-sufficiency in agri-
12,000 acres are reserved for Cornmonwealth Gov-
cultural produotion, the selection of policy options
ernment activities and roughly 24,000 acres are in
based on the principIe oí comparative advantage
agricultural use, most of which is rented out to the
would be more efficient for Puerto Rico. In order to
Sugar Corporation.
ascertain the Hnes of agricultural commodities or
services wherein the comparative advantage lies, rela-
Land Development and Outlook tively intensive study 01' production alternatives must
The island has special physical and population be undertaken. This report did not assume that task;
constraints that limit some types of development however, the Agriculture Sector Analysis appearing
while providing incentives or opportunities for other in the Report does discuss three optional policies 01
types. The more important of these oonstraints and agricultural development for the island.
incentives are worthy 01' sorne discussion.
Zoning Constraints.-As mentioned earlier, the MINERAL RESOURCES 1
Puerto Rico Planning Board possesses the institu-
tional framework for gniding land developrnent on In the early 1950's scientists of the V.S. Geological
the island. The physical and technical planning that Survey (USGS) in cooperation with Puerto Rican
takes place, however, needs to be coordinated with geologists began an intensive program to study and
continuing socio-econornic analysis of the desires and map the geology of the island? The map resulting
needs of land dwellers. Otherwise planning would frorn (he investigation shows fue distribution of min-
become more of a constraint 10 efficient development eral deposits in relation to various geological factors.
than a promoter. Without sufficient understanding of
public reactions, actual and potential, to policy Metal Resources
changes, technically feasible projects can easily fallo
The experience with high-rise housing is one such Puerto Rico has never been considered as an im-
example. In properly fulfilling public needs, there portant source oi mineral resources. Modest amounts
appears to be a significan t incentive for the Planning of gold, iron, lead, zinc, and manganese ores have
Board to take (he leadership in coordinating public been found on the island. Commercial exploitation
opinion and participation in proper land-use plan- of these deposits has been lintited, however.
ning. One of the more plentiful metallic ores on the
island is copper. Commercial amounts exist in al
Recreation and Forestry.-A second opportunity least two areas. Negotiations lasting over several
for efficient land use lies in the fact that outdoor years, between tbe Government of Puerto Rico and
recreational facilities could be expanded if the timber two mining companies have been unsuccessful be-·
trees were planted on the abandoned hillsides of fue cause of Iack of agreement over sharing of revenues.
island. Reforestation probably could provide an im- The companies estim3Jte fuat there is sufficient ore
proved, and more esthetic, environment within 5 to justify an average annual output of 50,000 tons for
years. Watersheds would be protected and small about 30 years.
wildlife could thrive. Within 25 years, harvestable Several Iateritic niekel deposits have also been dis-
timber could be expected, contributiog to overall covered in western Puerto Rico. The two largest
econornic development. deposits may be of near-commercial quality. How-
Labor Costs.-On an island with nearly 1.5 in- ever, the deposit at Las Mesas in Mayagnez is not
habitants per acre, the ratio of labor to land use accessible because of extended urban development.
becomes an especially important factor. Whereas The deposit in the Guanijibo area of Cabo Rojo is
light industry might provide 20 jobs per acre--es- being explored more extensively to determine its size.
pecially if high-rise buildings were used-heavy in- Recent evidence indicates fuat the reserve and the
dustry might provide only 3 jobs; production of orna- niekel content of fue deposit may be substantially
mentals would provide possibly 10 jobs; vegetable higher than originally estimated. This, coupled with
growing, 0.25 job per acre; sugar cane, 0.12; and 1 This section is based en material contributed by !he BureaU of
rice, 0.02. It does not follow, however, that activities Mines, Department of the Interior.
2 Metallogenic map of Puerto Rico may be purchased fram tbe U.S.
generating low labor to land ratios are necessarily Geological Survey.

120
rapid l1rbanization in the vicinity, reqnires immediate lion. Limestone resources and c1ay are found exten-
policy declsions by -ihe Government regarding land sively on tbe island and provide a source of input for
nse, further detailed exploration, and possible de- the island's two cernen! plants and for lime manu-
velopment of a mining operation. facture. Puerto Rico also has olher types of stone
Aside from the copper and nickel deposits, there useful in constrnction, such as vo1canic rocks, grano-
appears to be little evidence that other metals are diarite, and serpentenite. Vo1canic rocks are wide-
present in sufficient!y large quantities to justify com- spread and are the most cornmon1y quarried materials
mercial exploitation. However, further exploration is for construction purposes. Marble is also quarried
needed along these lines. and used in lhe manufacture of terrazo tiles.
Flood-plain sand and gravel deposits are one of
Petroleum Prospects lhe principal sources of aggregate found in Puerto
Favorable geologic conditions in lhe form of Rico that is suitable for making concrete. The de-
stratigraphic traps, both onshore and offshore, have posits are abundant and are widely drawn on
interested the Government of Puerto Rico in explor- throughout lhe island. As a future source, the off-
ing for oil and gas. Three onshore test wells were sbore sands appear to be ,¡he most proruinent pro-
drilled several years ago, but showed no traces of oil vider. In additíon to lhese supplies, there are also
or gas. However, the possibility of onsbore and/or several guarríes on tbe island tbat crush qnarried
offshore deposits still exists. At present, no major stones to fine aggregate size for concrete.
eJ<ploration effort is being undertaken by prívate
companies. The Government of Puerto Rico will con- Summary
duct an onshore seismic survey and test-drilling pro-
gram in lhe Dorado-Manatí area associated wilh Altbough Puerto Rico is nearIy devoid of com-
already identified offsbore prospects to determine the mercially exploitable mineral deposits, its non-
existence of petroleum and gas deposits. metallic mineral soutces seem adequate to meet most
any level of desired construction activity. Despite tbe
Nonmetallic MineraIs fact that present1y world príces prevent the exploita-
tion of existíng metallic mineral supplies in Puerto
Puerto Rico is more great1y endowed wilh con- Rico, interest could likely be stimulated in respect to
struction minerals than metals. In lhe past decade Puerto Rican deposits if metal prices were to rise to
lhe value of Puerto Rico's output of constrnction levels of 1974. Tbe potential for future petroleum
minerals-stone, cement, lime, clays, sand, and production can be determined only by fnrtber ex-
gravel-has increased from $63 million to $135 mil- ploration.

121
Annex Enc10sure to Mineral Resources
METALLOGENIC MAP OF PUERTO RICO
BY
DENNIS P. COX AND REGINALD P. BRIGGS

INTRODUCTION range in age from early Oligocene to Middle Miocene.


Surficial deposits mantle more than 15 percent of the
The purpose of a metalIogenic map is to show the area of Puerto Rico. These are compased of subaeriaI,
distribution of mineral deposits in relation to geologic alIuvial, and marine materials that were deposited fram
factors, particularly those factors that have had an im- Miocene time to the presento The surficial deposits are
portant infiuence on the formation of the deposits. concentrated predominantly in plains and filled valleys
Other types of mineral resource maps aid lhe mineral along the coasts and in a few large interior valleys
economist by showing graphicalIy the relationship be- (Weaver, 1964).
tween important mineral deposits and population cen- The volcanic-plutonic province.-The structure of the
ters and transportation routes. (For a description of volcanic-plutonic province is dominated by broad folds
Puerto Rico's mineral reSOUTees with more emphasis Oil and by extensive fault systems along which appreciable
mineral economics see Briggs, 1969a). The metallogenic tra1?scurrent movement has occurred. for the most part
map on the other hand is of principal benefit to the pros- in a left-Iateral sense. Both faults and fold axes are ori-
pector and economic geologist because it outlines target ented chiefiy along west to northwest trends, although
areas where certain types of depasits may be found. major faults also occur with other mientations (Briggs,
Consequently, metallogenic maps, especialIy large- 1964). Relatively shallow gravity gliding on a large scale
scale enes such as tbis, may show mineral occurrences has occurred in southern Puerto Rico (Glover and Matt-
which in themselves are far too small to have economic son, 1960), but no conclusive evidence for the presence
significan ce. Taken together however, such occurrences of deep-seated thrust faults has been found.
may delineate trends which guide the geologist in the Two zones of transcurrent fauIts in particular serve to
search for concealed deposits of greater value. This map, define subprovinces of the "older complex." One of
then, is not meant to illustrate the present mineral these zones, the great northern Puerto Rico fauIt zone.
wealth of Puerto Rico, but rather is intended as a extends from the Vieques Sound near Puerto de Hu-
prospecting tool. macao westward to a point about 35 kilometers west-
It should also be emphasized that maps of lhis type southwest of San Juan where it is overlapped by middle
can never be considered final. With new mineral dis- Tertiary rocks. Total offset on this fau!t zone may be
coveries, with new demands far minerals not now COD- well over 60 kilometers in a left-Iateral sense (Briggs
sidered valuable, and (or) with increased geologic and Pease, 1968). The other, the great southern Puerto
knowledge, new trends develop and new target areas Rico fanlt zone, extends from the coast about 10 kilo-
for exploration may be revealed. meters north of Mayagüez east-southeastward to a point
near Ponce where it too is overIapped by younger units.
GEOLOGIC FRAMEWORK Left-Iateral displacement along this zone may be greater
than that along the northern zone, for lithostratigraphic
Puerto Rico is readily divided into three broad geo- and structural contrasts are greater across this zone.
Iogic provinces. The largest of these is the mountainous The central volcanic-plutonic subprovince.-The ald-
volcanic-plutonic province, commonly called the "older est rocks described from the central volcanic-plntonic
complex," that is underlain chiefiy by volcanic and plu- subprovince are chiefiy massive vo1canic breccias tbat
tonic rocks ranging in age from Early Cretaceous to contain occasional limestone lenses near the top of the
middle Eocene. This province extends from coast to breccia section. N ear the San Lorenzo batholith these
coast east-west across the island and contains nearly all limestones are thermally metamorphosed and are lhe
of the metalliferous deposits. Resting on the fianks of hast rocks for magnetite-chalcopyrite deposits (locality
this volcanic-plutonic core are the northern and south- 38-9 and others). Fossils from limestones have been
em limestone provinces in which bedrock is composed assigned to the upper part of the Lower Cretaceous
of marine sedimentary rocks, chiefiy limestone, that (Briggs, 1969). No fossils have been identified from

122
rocks stratigraphically beneath, so one can say only thal Eocene age, inc1uding lavas, breccias, tuffs, and re-
!he oldest known rocks in the central subprovince are worked volcanic rocks (Mattson, 1960).
Early Cretaceous in age. Overlying the breccia section The northeastern volcanic-plutonic subprovince-The
are Lower Cretaceous (Albian) to Upper Cretaceous northeastern voleanic-plutonic subprovince is complex
(Santonian?) thin-bedded tuffaceous sandstone and silt- both structurally and stratigraphicaIly. On the west, lava
stone intercalated with basalt and andesite pillow lava, and relaled volcaniclastic strata of probable Late Cre-
basalt aqueagene tuff, and basalt and andesite voleanic taceous (Cenomanian) age rest on a thick sequence of
breccia (Berryhil! and G/over, 1960; Pease and Briggs, weIl stratified tuff, breccia, and lava of uncertain age
1960; Briggs and Gelabert, 1962; Berryhill, 1965; Nel- (Pease, 1968b). On the east, breccias and tuffs of Ceno-
son and Momoe, 1966; Nelson, 1967; Mattson, 1968b; manian Age rest on a very thick sequence of Lower
Briggs, 1969). Resting with partial unconformity on this Cretaceous (Albian) wel! stratified tuff and breccia
moderately wel! bedded section are sequences containing (Seiders, 1971a) which in turn rests on an older lava.
marine and nonmarine tuffaceous conglomerate, lime- The base of this section has not yet been mapped.
stone, marine and subaeriaI tuff, and subaeriaI vo1canic Overlying the Cenomanian racks is a thick sequence
breccias of Late Cretaceous (Santonian? to Maestrich- of Upper Cretaceous well-stratified too with sorne bree-
tian) age (Glover, 1961; Berryhill, 1965; Nelson and cia, limestone, and lava. These are overlain disconform-
Momoe, 1966; MaUson, 1968b). ably by lower Tertiary voleanic breccia, tuff, limestone,
Tuffaceous rocks and limestone of Paleocene to mid- and well stratified siltstone (Pease, 1968a; Seiders, 1971
dIe Eocene age overlie the Cretaceous rocks, also with b).
partial unconformity (Glover and Mattson, 1967; Nel- Although strata of the northeastem subprovinee are
son, 1967b; Mattson, 1968a, 1968b). In south-central widely altered hydrothermally, only one large intrusive
Puerto Rico where these rocks are complexly involved body, the Río Blanco stock, craps ont in the sub-
in a gravity glide series, limestone is the hast rack far province (Seiders, 1971a).
manganese deposits of smal! to moderate size (48-3 and The northern and southern limestone provinces.-
others). o
After middle Eocene time extensive uplift occurred
One of the chief characteristics differentiating the cen- along an east-west axis. Erosion and subsequent depres-
tral subprovince from those on the southwest and north- sion of the Puerto Rico area was accompanied by
east is the presence within this crustal block of large deposition of the nonvoleanic rocks of the northern and
plutonic bodies. The San Lorenzo and Utuado batho- southem limestone provinces. Strata of the larger of
liths and numerous smaller bodies occupy perhaps 20 these two, the northem province, include only slightly
percent of the outcrop area of the central subprovince deformed marine limestone, marl, claystone and sub-
(Briggs, 1964). The age of intrusion appears to be cen- ordinate dolomite that dip gently northward (Zapp and
tered at about the close of the Cretaceous Period, for others, 1948; Monroe, 1966). The southem limestone
Upper Cretaceous units have been intruded (Glover, province is similar lithologically, but is highly faulted in
1961; Briggs and Gelabert, 1962; Berryhill, 1965; Nel- comparison to the northem province (W. H. Monroe,
son, 1967b), but middle Eocene rocks rest on exposed written commun., 1970). The limestones of the north-
plutonic racks (Mattson, 1966, 1968b). Granodiorile ern province display a striking karst topography (Mon-
makes up the bulk of larger plutonic bodies, but diorite, rae, 1968). In the southem province karst development
quartz diorite, gabbro, and quartz monzonite also are is relatively minoro
common (Weaver, 1958; Broedel, 1961; Nelson, 1967b; Superficial deposits.-Tbese deposits include the blan-
Mattson, 1968a). A graup of quartz diorite porphyry ket sands of Miocene to Holocene age which are wide-
stocks of Eocene age has been recognized along the spread in the karst areas of northern Puerto Rico
south border of the Utuado batholith. These include the (Briggs, 1966), Pleistocene eolianite and marine caleare-
copper-mineralized stocks at Tanamá and Río Viví. nite along the north and west coasts (Kaye, 1959a), and
Holocene alluvial, swamp, delta, piedmont, beach, and
The southwestern volcanic-plutonic subprovince.- dune deposits. Large landslide deposits are prorninent
Tbe chief characteristics of the southwestern voleanic- features in sorne areas (Pease and Briggs, 1960; Monroe,
plutonic subprovince lhat differentiate it from the re- 1964, 1967), and high-level weathered terrace deposits
mainder ofPuerto RiCO' are the presence there of large occur that may be as old as middle Tertiary in age.
bodies of serpentinite and of extensive thick marine Erosion surfaces bearing residual and transported lat-
limestones (Mattson, 1960). The serpentine provides the eritic earth are relies of ancient sea stands to leveIs as
bedrock source for laterite deposits containing nickel, high as perhaps 800 meters (Weaver, 1960, 1968). One
iron and cobal!. Plutonic bodies of any size are rare. of the more prominent of these surfaces is about 600
The oldest rocks in the area are included in the Bermeja meters elevation in central Puerto Rico, and has been
Complex of Mattson (1960) which contains the ser- aBsigned a tentative Miocene age (Briggs, 1960). Most
o pentinite as weIl as amphibolite, chert, and metamor- of the erosion surfaces have been dissected extensively
phosed volcanic racks. The Bermeja prabably is Early and sorne have been warped. Stepped relationships sug-
Cretaceous in age. gest that sorne surfaces have been faulted. One nickelif-
Overlying the Bermeja Complex is a sequence of lava, erous laterite deposit (28-2) occupies a surface ranging
agglomerate, marine limestone, mudstone, and tuff fram about 15 to 100 m elevation, another (29-1) is on
which is mostly if not entirely Late Cretaceous in age. a surface that rises from about 50 m on the west lo about
Resting on this sequence are strata of Paleocene and 400 m on the east, and one of the smaller deposits (30-

123
3) occurs as high as 880 m in elevation (Heidenreich copyrite-bornite, or sphalerite-galena-barite in a gangue
and Reynolds, 1959), of quartz, carbonates and zeolites, are found around. the
exposed south side of this stock and of the small nelgh-
METALLOGENIC MAP boring pluton to the west. High silver values are charac-
teristic of these occurrences and suggest that this cluster
Symbols,-The map shows 184 mineral occurrences, is genetically distinct from the larger group of copper
prospects, smal! mines, and important ore deposits. The deposits to the southwest.
nature of each occurrence Of deposit is shown on the Manganese deposits and small copper veins occur dis-
map by a colored symbol and on lhe accompanying list- continuously along the southwest flank of the central
ing by a corresponding alphanumeric code. The symbol vo1canic-plutonic subprovince and are most numerous
and code describe the metal or metals contained in the around the Juana Diaz manganese mine (48-3) near the
deposit, the nature of the plutonic igneous rock that is south coast of the island. These deposits contain mainly
most closely associated with the deposit, and the type of secondary manganese oxides and copper carbonates, and
hydrothermal alteration that accompanied the mineral- the nature of their hypogene minerals is no! clear. Rem-
ization. The size of the deposit and its geologic type are nants of rhodonite, quartz, calcite and epidote are pres-
shown, as wel! as the type and age -of the vol carne or ent in two of the manganese deposits, and native copper,
sedimentaty host rocks. tetrahedrite(?), and chalcocite are found al one of the
Ore and gangue minerals are listed on the map for copper occurrences (14-2). Two other small manganese
most of the localities, but stress is laid on the primaty deposits and a copper occurrence (21-1, 21-2, 21-3)
minerals of the deposit rather than on those produced are íound on the north flank of the central subprovince.
during weathering. All copper deposits on the island con- This suggests that manganese and associated copper
tain sorne malachite ar azurite, for example, and aIl of mineralization was controlIed by the two major zones of
the manganese deposits are composed mainly of com- transcurrent faults that separate the subprovinces.
plex oxide minerals. Repetitious listing of these minerals Nickel, iron, and cobalt are concentrated in lateritic
is avoided. soils overIying the serpentine bodies in the southwestern
The accompanying listing shows, in addition to the subprovince. Intensive chemical weathering produced
code, the map number, latitude and longitude and bib- the soils, residually enriched in metals.
liographic references for each point. For deposits of Dolomite is present in moderate to large quantities in
wide areal extent, the latitud e and longitude represent the N orthern Limestone Province (V ázquez and others,
the approximate center of the deposito 1957). The largest po!ential source of dolomite is Isla de
The metallogenic code and symbol system is modified Mona which apparently is composed chiefly of a calcitic
from the system adopted by the North American Metal- dolomite unit capped by a relatively thin limestone unit.
logenic Map Committee. Modifications, which were nec- Isla de Mona also is the site of small to moderate-sized
essary because of the small size and limited number cave phosphorite or guano deposits. This material forms
of geologic environments of the map area and the ab- deposits local!y as thick as 3.5 m on the floors of caves
sence of certain types oí deposits, have resulted in the which are developed chiefiy in the lower 10m of tbe
omission of sorne numbers from the cade used herein. limestone unit where this zone crops out in the steep
In general, however, this map is compatible with the cliffs that surround the island. Map symbols on the
metallogenic maps of Central America (at 1 :2,000,000) island show points where samples analyzed as dolomite
and North America (at 1:5,000,000). have been collected and show also the chief caves from
lnterpretation.-On examination of the map, a few which phosphorite was mined in the period 1877 to
clusters, trends and associations of mineral occurrences 1924.
can be seen that have interesting geologic connotations.
For example, copper deposits and occurrences forro an PUBLISHED SOURCES
a1most continuous belt along the south side of the Vtua-
do batholith. Chalcopyrite is the main hypogene ore Ackerman, D. H., 1970, Mining: Industrial Puerto Rico,
mineral; magnetite and pyrite are abundant gangue min- V. 7, no. 1, p. 10-17, 64-66.
eraIs. Molybdenite is arare associate of chalcopyrite. Bergey, W. R., 1966, Oeochemical prospecting for cop-
Hydrothermal al!eration is widespread along this bel!, per in Puerto Rico, in Caribbean Oeol. Conf., 3d,
and al!ered quartz diorite porphyry is the host rock in Kingston, Jamaica, 1962, Tran.: Jamaica Oeol. Sur-
the largest deposits at Tanamá (17-3) and Río Viví vey Pub. 95, p. 113-119.
(32-8,32-10). Probably all oí these deposits are young- Berkey, C. P., 1915, Oeological reconnaissance oí Porto
er than the Vtuado batholith which locally is itselí hy- Rico: New York Acad. Sci. Annals, V. 26, p. 1-70.
drothermally al!ered and mineralized. Rather the de- Berryhill, H. L., Jr., 1965, Oeology of the Ciales quad-
posits are most dosely associated with Eocene porphyry rangle, Puerto Rico: V.S. Oeol. Survey Bull. 1184,
stocks which were intruded along the flank of the batho- 116 p.
lith. Berryhill, H. L., Jr., and Glover, Lynn 3d, 1960, Oeol-
Occurrences of zinc and zinc-copper in small veins are ogy of the Cayey quadrangle, Puerto Rico: V.S. Oeol.
roughly peripheral to this bel! as would be expected in Survey Mise. Oeol. Inv. Map 1-319.
a typical zonal relationship. Briggs, R. P., 1960, Laterization in east-central Puerto
Another cluster of points is found associated with the Rico: Caribbean Oeol. Conf., 2d, Mayagüez, Puerto
Morovis stock. Small veins, containing digenite or chal- Rico, 1959, Tran., p. 103-119.

124
_ _ _ 1961, Geology of Kewanee Interamerican Oil ogy of the Coamo quadrangle, Puerto Rico: U.s.
Company test wel! number 4CPR, northern Puerto Geol. Survey Mis. Geol. Inv. Map 1-335.
Rico in Oil and gas possibilities of northern Puerto Glover, Lynn, 3d, and Mattson, P. H., 1960, Successive
Rico, San Juan, Puerto Rico Mining Comm., p. 1-23. thrust and transcurrent faulting during the early Ter-
_~ _ _-1964, Provisional geologic map of Puerto Rico tiary in south-central Puerto Rico: U.S. Geol. Survey
and adjacent islands: U.S. Geol. Survey Misc. Geol. Prof. Paper 400-B, p. B363-B365.
luv. Map 1-392. ____ 1967, The Jacaguas Group in central-southern
_ _ _ 1966, The blanket sands of northern Puerto Puerto Rico, in Changes in stratigraphic nomenclature
Rico. in Caribbean Geol. Conf., 3d, Kingston, Ja- by the U.S. Geological Survey, 1966: U.S. Geol. Sur-
maica, 1962, Trans.: Jamaica Geol. Survey Pub. 95, vey Bull. 1254-A, A29-A39.
p. 60-69. GuilIou, R. B., and Glass, J. J., 1957, A reconnaissance
____ 1969a, Mineral Resources of Puerto Rico--an Study of the beach sands of Puerto Rico: U.S. Geol.
autHne with remarks on conservation: Colegio Ingen- Survey Bull. 1042-1, p. 273-305.
ieros, Arquitectos, Agrimensores Puerto Rico Re- Hamilton, S. H., 1909, Notes on sorne ore deposits of
vista, v. 19, no. 2, p. 27-40. Porto Rico: Eng. Mining Jour., v. 88, p. 518-519.
____ 1969b, Changes in stratigraphic nomenclature Heidenreich, W. L., and Reynolds, B. M., 1959, Nickel-
in the Cretaceous System, east-central Puerto Rico: cobalt-iron-bearing deposits in Puerto Rico: U.S. Bur.
U.S. Geol. Survey Bul!. 1274-0, 31 p. Mines Rept. Inv. 5532, 68 p.
----1971, Geologic map of the Orocovis quad- Hildebrand, F. A., 1960, Zones of hydrothermaIly al-
rangle, Puerto Rico: U.S. Geol. Survey Misc. Geol. tered racks in eastem Puerto Rico: Caribbean Geol.
Inv. Map 1-615, in press. Conf., 2d, Mayagüez, Puerto Rico, 1959, Trans., p.
Briggs, R. P., and Gelabert, P. A., 1962, Preliminary 130-136.
report of the geology of the Barranquitas quadrangle, _ _ _ 1961, Hydrathermally altered rocks in eastern
Puerto Rico: U.S. Geol. Survey Misc. Geol. Inv. Map Puerto Rico: U.S. Geol. Survey Prof. Paper 424-B,
1-336, 2 sheets. p. B219-B221.
Briggs, R. P., and Pease, M. H., Jr., 1968, Large- and Hodge, E. T., 1920, The geology of lhe Coamo-Gua-
small-scale wrench fauIting in an island-arc segment, yama district, Porto Rico: New York Acad. ScL, SeL
Puerto Rico [abs.]: Geol. Soco America Spec. Paper Survey Porto Rico and Virgin Islands, v. 1, p!. 2, p.
115, p. 24. 111-228.
Broedel, C. H., 1961, Preliminary geologic map showing Hubbard, Bela, 1923, The geology of the Lares district,
iron and copper prospects in the Juncos quadrangle, Porto Rico: New York Acad. ScL, ScL Survey Porto
Puerto Rico: U.S. Geol. Survey Misc. Geol. Inv. Map Rico and Virgin Islands, v. 2, pt. 1, p. 1-115.
1-326. J ackson, C. F., 1934, Informe sobre depósitos minerales
Cadilla, J. F., 1963, Geology of the Humacao titanifer- en Puerto Rico: Revista Obras Públicas Puerto Rico,
DUS iron deposit: Caribbean Jour. Sci., v. 3, no. 4, p. año 11, no. 6, p. 655-667.
243-247. Kaye, C. A., 1959a, Shoreline features and Quaternary
Colony, R. J., and Meyerhoff, H. A., 1928, The copper shoreline changes, Puerto Rico: U.S. Geol. Survey
prospect at Barrio Pasto, Porto Rico: Econ. Geology, Prof. Paper 317-B, p. 49-140.
v. 23, no,. 5, p. 515-527. ____ 1959b, Geology of Isla Mona, Puerto Rico,
____ 1935, The magnetite deposit near Humacao, and notes on age of Mona Passage: U.S. Geol. Survey
Puerto Rico: Am. Ins!. Mining Metal!. Eng. Trans., Prof. Paper 317-C, p. 141-178.
v. 115,p. 247-272. Knoerr, A. W., 1952, Minnesota mining men open up
Domenech, M. V., 1899, Porto Rico, her mineral re- rich Puerto Rico iron mine: Eng. Mining Jaur., v.
saurces; their value and extent and the reasons why 153, no. 8, p. 74-79.
they are not more developed: Mines and Minerals, v. Low, Bela, 1929, The mineral deposits of Porto Rico:
19, p. 529-532. Eng. Mining Jour., v. 128, no. 1, p. 5-7.
Dutton, C. E., 1955, !ron ore deposits of North America Mattson, P. H., 1960, Geology of the Mayagüez area,
and the West Indies, in United Nations Dep!. Econ. Puerto Rico: Geol. Soc. America Bull., v. 71, no. 3,
and Social Affairs Survey and world iron resources; p.319-362.
occurrence, appraisa