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Report to fue President

prepared by fue Interagency Task Force
coordinated by fue United States
Department of Commerce.


United States Department of Cornrnerce

December 1979


Por sale by the Superintendent of Documents, U.S. Government Printing Office

Washington, D.C. 20402 (per set)

Stock Number 003-009-00328-8


The Economic Study of Puerto Rico originated in a meeting on March 2,
1977, between President Jimmy Carter and Governor Carlos Romero-Barcelo of
the Cornmonwealth of Puerto Rico. In considering the economic situation of Puerto
Rico, President Carter suggested in the meeting, and Governor Romero agreed,
that a group of executive branch officials from appropriate departments be
fonned to carry out a Federal study of tbe 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 the
responsibility for Oyeran guidance of the Study, the Secretary assigned policy
management to Jerry J. Jasinowski, the Assistant Secretary of Commerce for
Poliey. Mr. J asinowski convened Assistant Secretary-level representatives of !he
departments to be involved on March 24, 1977, to take up the beginning work
of the projeet, and the representatives fonned the Interagency Study Group (ISG).
A Federal Study Director was named to prepare the design of the Study, set out
a schedule 01' 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 oftbe Study, its approach and topic coverage, and the responsibilities
of individual agencies.
From the outset, the ISG felt that it was most important for tbe Study to avoid
political questions. In accordance witb this decision, the Study does not examine
the economic implications of a change in Puerto Rico's political 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 effort should be confined to economic problems, with
an emphasis on the impact of Federal programs on these problems. Furtbennore,
the primary view of the ISG was that the Study should be tboroughly 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 funy the
broad spectrum of interests of residents of Puerto Rico. The ISG also felt that
the setting of priorities and policies for continued economic progress is the pre-
rogative of Puerto Rican residents. This view logically prec1uded the deve10pment
from the problems analysis of a set of recommendations or priorities which would
constitute, in sorne sense, an ecouomic plan Or projection for the future of the
island. The purpose intended for tbe 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 tbat the Study
propose a series of economic policy options and approaches which Puerto Rican
policymakers could draw upon in liue with priorities established for the economy.
The options introduced throughout the Study involve broad choices with respect
to basic policy thrust, as wen as detailed programmatic changes. Federal Govern-
ment options are also inc1uded, but these are necessarily confined to possibilities
pennitted under prevailing Federal legislation. With respect, however, to sorne
programs of the Department of Health, Education, aud Welfare, there are men-
tioned legislative proposals which have been under consideration in tbe executive
or legislative branches in recent years.

To maintain effective coverage and manageability, the ISG 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 major problem
areas delineated lor the Study.
Alter setting this course 01 action, the ISG arranged a meeting with Puerto
Rican Government officals to go over the general lines 01 the approach to be used
in the Study and the Study's limits and content. The meeting was held in Washing-
ton on May 17, 1977. The Puerto Rican Government group was headed by Mr.
Miguel Rivera-Rios, President 01 the Puerto Rico Planning Board. The group
agreed to the ISG general plans and offered to prepare background materials to
help get the Study underway. Dnder the coordination al Mr. Rivera-Rios, a Puerto
Rican connterpart committee to the ISG soon thereafter completed a detailed
agenda 01 Puerto Rico's problems. The agenda provided a valuable basis 01
departure for the Federal agencies involved in the Study. On June 24, 1977,
lollowing agreement within the ISG as to the final design and content 01 the
Study, work was begun. In the remainder 01 1977 extensive field work and research
were undertaken by the ISG agencies.
After the initial phases 01 the project were underway, Deputy Assistant Secre-
tary 01 Cornmerce S. Stanley Katz and the Study Director met with Cabinet-level
officials 01 the Puerto Rican Govemment in San Juan on November 18, 1977.
A review 01 the Study's approach, limits, content, and organization was made
lor the Puerto Rican officials and a progress report on work to date was presented.
Detailed outlines 01 all parts 01 the Study were tabled and requests were made
to the Pnerto Rican Govemment lor special data that were needed lor the planned
Preliminary dralts 01 the sections 01 the Study were finished by the ISG agen-
cies in early 1978. The Department 01 Commerce reviewed them and made appro-
priate suggestions lor changes to produce a complete and well coordinated final
product. In order to lacilitate the process 01 coordination, a series 01 ISG meetings
was held in the spring 01 1978. The ISG examined Study results, inc1uding the
findings 01 the overal! economic assesssment produced by the Office 01 the Chief
Economist for the Department 01 Commerce. The ISG agreed on the major
problems and issues revealed in the analysis of the aggregate economy and on
the options set out in the Study. Fol!owing this series 01 meetings, steps were
taken among ISG agencies to assure the final interagency coordination 01 al!
'aspects 01 the Study.
Drafts 01 the assigned Study sections were completed by the agencies in the
lall of 1978 and a dralt 01 the complete Study was provided to the Puerto Rican
Govemment for review on October 30, 1978. The Puerto Rican Government
conducted an examination 01 the Study and made the final results 01 its review
available on March 20, 1979. The review prodnced suggestions, clarifications,
and data refinements which the ISG lelt contributed materially to the accuracy,
soundness, and c1arity 01 the Study.
Deputy Assistant Secretary 01 Commerce Frederick T. Knickerbocker and the
Study Director led a delegation of ISG representatives to San Jnan 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 discnss the review
findings and lay the ground for the final revisions 01 the Study. In accordance
with the mutual understandings reached in the meetings, the ISG agencies under-
took the last alterations and additions necessary to ready the Study for publication.
Wbile the Study was carelully coordinated with the Puerto Rican Govemment
throughout its preparation, al! views in the Study are ultimately those 01 the ISG.
During preparation 01 the Study the Puerto Rico Planning Board and other
agencies 01 the Puerto Rican Govemment extended invaluable assistance to
representatives 01 the Federal Govemment. ISG teams visited Puerto Rico lor
their fieldwork and al! their efforts were supported by provision 01 access to key

Puerto Rican Government officials and to the exteusive data resources of the
Government. Puerto Rican technicallevel personnel were very helpful in furnishing
statistical material and numbers of essential data compilations were specia1ly
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 ecouomy has been subject to a great deal of examination
and analysis over the years, and the large, valuable body of literature available has
been widely consulted by ISG agencies. Previous inquiries, however, were generally
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 effort have made possible a study of the
most comprehensive scope yet undertaken.

William B. Pounds
Study Director

Table of Contents
PREFA CE ___________________________________________________________________________________________________ ________ iii

T ABLE OF CONTENTS _____________________________________________________________________________ vii

INTROD U CTI ON _________________________________________________________________________ __________________________ ix

• IND US TRy ______________________________________________________________________________________________________ xv

CHAPTER L---SUMMARY AND FINDINGS ____________________________________________ 1
STRATEGY, AND POLICY _____________________________________________ 15
SECTOR __________________________________________________________________________ 23
PROGRAM ____________________________________________________________________ 73
CHAPTER VII.-INDUSTRIAL LINKAGE ANALYSIS ______________________________ 87
CHAPTER VIII.-IMPORT SUBSTITUTION ___________________________________________ 91
IND USTRy __________________________________________________________________ 107
ASSISTANCE PROGRAMS _______________________________________________ 119
ADMINISTRATI ONS ____________________________________________________ 127
TO THE UNITED STATES __________________________________________ 263
APPENDIX D.---SELECTED BIBLIOGRAPHY _________________________________________ 279

• AGRICULTURE, FOOD, AND RURAL LIVING __________________________________________ 285

CHAPTER I.-INTRODUCTI ON _____________________________________________________________ 289
CHAPTER IV.-RURAL LIVING CONDITIONS ____________________________________________ 313

• TOURISM _________________________________________________________________________________________________________ 3 21
CHAPTER I.-INTRODU CTI O N ________________________________________________________ 325
CHAPTER IV.-MAJOR ISSUES AND POLICIES ____________________________________ 343

• HOUSING AND CONSTRUCTION _____________________________________________________________ 349
• H O USING ______________________ ______________________________________________________________________ 3 53
• CONSTRU CTI ON ______________________________________________________________________________ 369

• TRANSPORTATION _________________________________________________________________ 385

TRANSPORTATION ____________________________________________________________________________ 389
APPENDIX A.-AVIATION SERVICE ______________________________________________________ 425
APPENDIX C.-TRAFFIC SAFETY _____________________________________________________________ 439
APPENDIX D .-LIST OF A CR ONYMS ________________________________________________________ 441

• ENER G Y ______________________________________________________________________________________________________ 491

ENERG Y-SUMMARy _______________________________________________________________________________ 495
CHAPTER l.-PUERTO RICAN ENERGY OVERVIEW _____________________________ 497
PROGRAMS ON PUERTO RICO __________________________________________ 513
APPENDIX A.-PETROLEUM REFINING SECTOR _____________________________________ 524
APPENDIX B.-PETROCHEMICAL SECTOR ____________________________________________ 527
APPENDIX C.-ELECTRIC UTILITY SECTOR ______________________________________ 531
APPENDIX D.-CONSUMER SECTOR ________________________________________________________ 536

• COMMER CIAL BANKING __________________________________________________________________________ 539

CHAPTER l.-BANKING STRUCTURE AND GROWTH _____________________________ 543
CHAPTER III.-BANK EARNINGS ____________________________________________________________ 555
CHAPTER IV.-CURRENT ISSUES ________________________________________________________ 561
APPEND IX T ABLES __________________________________________________________________________________ 571
BIBLIOGRAPHY ______________________________________________________________________________________ 579

• EMPLOYMENT, WAGE STRUCTURE, AND MIGRATION _____________________________ 581

CHAPTER l.-INTROD U CTION __________________________________________________________________ 585
CHAPTER IV.-WAGE STRUCTURE IN PUERTO RICO __________________________ 617
STRUCTURE __________________________________________________________________ 633
CHAPER Vl.-FRINGE BENEFITS _________________________________________________________ 643

• SOCIAL CONDITIONS AND HUMAN SERVICES _______________________________________ 675

SERVI CES PR OGRAMS _____________________________________________________________________ 679
AND INDIVID UALS ________________________________________________________ 687
SYSTEM __________________________________________________________________ 717

The Economic Study of Puerto Rico is made up of tbree 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, exteroal trade, infiation, investment, and
the role of goveroment. The assessment draws on information in the various
sector reports of the Study and brings together separate material in an overall
contexto The assessment sets out the majar issues confronting the Puerto Rican
economy; fuese subsume al! the other issues that are treated in the body of the
Study. In addition, Part One provides a conceptual framework for the development
of majar alteroatives 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 the Part Three sector reports plus aH additional
programs that are significant in Puerto Rico. Aspects covered inelude 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
profiles 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 essentiaHy sectoral in its approach and the sector analyses coHectively
account for the main body of the Puerto Rican economy. The sector studies cover:
Agriculture, Food, and Rural Living
Housing and Construction
Commercial Banking
Employment, Wage Structure, and Migration
Social Conditions and Human Services
No provision is made for a separate sectoral treatment of services, but the
Banking and Tourism Sectors together are important components of prívate
services activity in Puerto Rico, and most public enterprises services are covered
in the Energy and Transportation Sectors. Particular atlention is given to the
goods sectors and, within this framework, Industry receives an emphasis consistent
with its major contríbution to output. Construction is accorded special sectoral
treatment since it also is an important economic activity in Puerto Rico. A separate
sector study is ineluded on employrnent, unemployment, and wages because these
labor aspects are of vital concero, and likewise, a separate report is provided for
social conditions and human services in consideration of the linkage to economic

progress. Each sector study provides a view of the strúcture and operation of the
sector, an examination oí relevant Federal programs and policies, an analysis of
!he significant problems, and a presentation of policy and program options.
An Executive Summary is provided in the forepart oí !he Study.

PartThree:· Sector Studies
Under a grant from the U.s. Department of Commerce, the Institnte of Inter-
national Law and Economic Development, of Washington, D.C., carried out the
basic data coIlection and analysis for the Industrial Sector Study. Work under the
grant was supervised by L. Randolph Mye of the Puerto Rico Study Staff of the
U.S. Department of Commerce. Revisions and additions in succeeding drafts were
written by Mr. Mye, aided by suggestions from George D. Hanrahan, of the Office
of the Chief Economist of the Department of Commerce, and Study Director Wil-
liam B. Pounds. David McMeans of the Study Staff contributed the appendix that
analyzes Puerto Rican shipments of manufactures to the United States.
Many individuals in the Puerto Rico Planning Board notably Suriel Sanchez,
Rosendo Miranda, and OIga Martinez, extended invaluable assistance in coIlecting
data and in offering interpretations and advice. Bertram Finn, William Martinez,
and AIIan U daIl of the Puerto Rico Economic Development Administration were
also most helpful in contributing information and suggestions. In addition, mem-
bers of the Puerto Rican business community, consultants, university teachers, and
other private individuals provided many helpful views.
Table of Contents
CHAPTER l.-SUMMARY AND FINDINGS ____________________________________________ 1
The Study __________________________________________________________________________________________________ 1
Puerto Ricau Development Strategies _______________________________________________________________ 10
Federal Government Options _________________________________________________________________________ 12


AND POLI CY ________________________________________________________________________ 15
Faotors Affecting Sector _____________________________________________________________________________ 15
Development Policy, Strategy, and Programs __________________________________________________ 16
Development P olicy and Program ______________________________________________________________________ 17


SECTO R ________________________________________________________________________________ 23
Overall Sector Growth ______________________________________________________________________________________ 23
Internal Sector Changes _____________________________________________________________________________________ 26


IMPLICATIONS FOR SECTOR POLICY ___________________________________ 41
Labor Income as a Ratio of Sectoral Net Income _________________________________________________ 42
Factors Conditioning Production of Benefits ______________________________________________________ 42
Integrated Analysis and Conc1usions ___________________________________________________________________ 49
Implications for Governmeutal Policy ______________________________________________________________ 49


Introd uctio n _______________________________________________________________________________________________________ 53
General Conditions Which Influence Industries' Position in Puerto Rico _______________ 54
Labor Costs __________________________________________________________________ .___ .__________________________________ 55
Comparison of Productivity Trends and Levels of the
United States and Puerto Rico ___________________________________________________________________ 62
Some Preliminary Analysis of Individual Industries _____________________________________ ~________ 64
Profitability __________________ _______________________________________________________________ _____________________________ 65
Energy Costs ________________________________________________________________________________________________________ 67
Surnmary and Conc1usions _____________________________________________________________________________________ 70


Intro ducti on _______________ _______________________________________________________________________________________ 73
Federal and Puerto Rican Industrial Tax Structures _______________________________________________ 73
Appraisal of Tax Exemption Programs in Puerto Rico ___________________________________________ 79

CHAPTER VII.-INDUSTRIAL LINKAGE ANALYSIS _________________________________________ 87

Background ____________________________________________________________________ ___________________________________ 87
Linkage Prospects in Puerto Rico _______________________________________________________________________ 88
The Nature Industrial Investment Linkages ________________________________________________________ 89
Conc1usions and Policy Implications __________________________________________________________________ 90

CHAPTER VIII.-IMPOR T SUBSTlTUTIO N ______________________________________________________ 91

Introduction __________________________________________________________________________________________ 91
Theoretical Cousideration and International Experience ___________________________________________ 91
Puerto Rican Imports and Potential Import Substitution Industries _______________________ 96
Analysis of Selected Import Substitutiou Industries ____________________________________________ 98
Table of Conlenls-· Conlinued

INDUSTRy _________________________ _____________________________________________________ 107
Intro d ueti on ______________________________________________________________________________________________________ 107
Trend in Puerto Riean Market Shares ____________________________________________________________ 108
The Impaet of U.S. Foreign Trade Poliey on Puerto Rican Competitiveness ____________ 112
The Impaet of Foreign Exehange Poliey on Puerto Riean Competitiveness _____________ 116
Poli ey Options ____________________________.._________________________________________ ._________________________ 117


PR OGRAMS _________________________________________________________________________________ ____ 119
Federal Assistanee Programs Affeeting the Industrial Sector _________________________________ 119


Introduetion ___________ ~::::~ __ ~___ __ _ _____ ___________________________________________________ 127
~e Funetion and Aeeomplishments of Foment;-:::::___________________________________________ 127



INDUSTRIAL SECTOR ANALYSIS ________________________________________ 139


APPENDIX D .--SELECTED BIBLIOGRAPHY _________________________________________________ 279
Chapter I.-Summary and Findings
THE STUDY tremely effective in attracting manufacturing plants,
as indicated by the increase in the manufacturing
Strategy for Development sector's net domestic income from $89 million in
1950 to $2,845 million in 1977.
Industrial development has been the prime factor This policy has operated since its inception with
fostering economic growth in Puerto Rico since the no basic change in objectives, but in its implementa-
late 1940's. Initially the Puerto Ricans through the tion there was a shift away from emphasis on less
Industrial Development Company, a government competitive labor-intensive, low wage industries to-
entity, attempted to create government enterprises in ward industries capable of paying higher wage rates,
the cement, glass container, paperboard, structural which turned out to be industries with regulated
clay product, and shoe industries. However, by monopoly or capital-intensive characteristics. These
1948, the Puerto Ricans realized the limitations of characteristics usually involved an increase in the
public control and ownership. embodied capital-labor ratio. The new administra-
The inherent 1irnitations of the policy of direct tion which took office in 1977 announced one sig-
government development of manufacturing enter- nificant change in future policy. While the manufac-
prises (among them, limited financial resources and turing sector is to continue to receive major em-
lack of marketing and distribution systems, skills, phasis and to be considered as a "stanchion" of the
management, etc.) led to the structuring in the late economy, it is not to be given exclusive attention.
1940's of a new strategy to promote Pnerto Rico's Increased attention is to be given to other sectors,
economic transformation. This strategy was based particularly agriculture and certain components of
on attracting external investors to establish manu- the services sector.
facturing plants that would export most of their
production from Puerto Rico to the U.S. market, or
third markets if possible.
In implementing this policy strategy, Puerto Rico The Puerto Rican export-led development strategy
offered a variety of advantages: has resulted in very large increases in output, in
significant changes in economic structure, and in
(1) The position within the U.S. customs union of great1y increased consumption levels.
manufacturing plants located in Puerto Rico;
(2) A comprehensive Puerto Rican tax exemption Overall Growth-The economy as a whole has
program, coordinated with an advantageous special grown significant1y.
status granted by U.S. tax legislation to U.S. sub- a. Gross domestic product increased from $572
sidiaries operating in designated areas, including million in 1947 to $9,717 million in 1977. In real
Puerto Rico-"possessions corporations"; terms (1954 dollars) it increased by 565 percent
(3) A significant wage-cost differential between over the period. '
Puerto Rico and the United States, which was b. Gross product (equivalent to GNP in U.S. na-
related to the special treatment granted to Puerto tional account terms) grew from $612 million in
Rico in the application of Federal mínimum wage 1947 to $7,914 million in 1977. In real terms, it
legislation; increased by 410 percent from 1947 to 1977.
(4) Snbsidized rents, wages, training, etc., also c. GNP per capita rose from $154 in 1940 to
used as incentives to attract new firms; $2,391 in 1977. It increased in real terms by 197
(5) The creation, in 1950, of a new agency, the percent from 1950 to 1973, after which it declined
Economic Development Administration (EDA), in slightly, falling from $1,186 to $1,086 in 1977. This
order to coordinate and promote the industrializa- increase is alI the more remarkable when it is con-
tion programo
1 TIte base year used .in the Puerto Rican statistical series in con-
Theabove factors have undoubtedly been ex- verting current values to real terms is 1954.

sidered that population rose from 2,200,000 in 1950 Manufacturing Employment.-The manufaeturing
to 2,912,000 in 1973, and to 3,267,000 in 1977. sector has been an important contributor to employ-
d. Employment inereased by 239,000, from ment ereation. Manufaeturing employment inereased
536,000 to 775,000 from 1947 to 1974, but fel! in from 56,000 in 1940 to 147,000 in 1974, but was
1975 with slow recovery strength. 144,000 in 1977.
Contribution by Sectors.-There has been con- The U.S. reeession in 1975 impacted heavily on
siderable variation in the performance of the sectors the manufaeturing seotor, causing a decline in em-
in their direct contributions to this growth. ployment or abant 13,300 jobs, or about 15 pereent
a. Manufaeturing; commeree (wholesale and retail of total sector employment. The decline in employ-
ment during the reeession was generally concentrated
trade); government; and finance, insuranee and real
in chemieals and in electric machinery, which are
estate have in descending order been the largest con-
esserutially export-oriented, and in construction ma-
tribntors to the increase in GDP.
terials, which refleeted the slowdown in the con-
b. Government, commerce, manufacturing, and
struction industry. However, employment over the
services, in that order, have made the largest eon-
long term in the chemical industry (of which drugs
tribntions to absolute increases in employment.
are a part) has increased strongly. It rose by 256
c. The position of agrieulture in the economy has
percerut between 1970 and 1976, while total manu-
dec1ined dramatically. Agrieultural output, which
facturing employment inereased by only 6 percent in
was 20.6 percent of GDP in 1947, was only 3.5 per-
the same periodo It appears that the bulk of the in-
cent in 1977. Output in real terms fel! absolute1y
crease of employment in chemicals was registe red by
over that period (from $154 million in 1954 dollars,
the drng industry as it expanded operations.
to $127 million). Employment dropped by 188,000
in the period 1947 to 1977, from 229,000 to 41;000, Profits.-Profit expectations play the key role in
and from 42.7 pereent to 5.5 pereent of total em- the Puerto Rican tax exemption policy for indus-
ployment. trialization. Manufaeturing sector profits rose at an
d. The government sector inereased employment average annual rate of abaut 13.8 pereent for the
al! an average annual rate of 7.2 pereent between period 1947-77. In 1975, the gro'Mth of net profits
1940 and 1977, while the eeonomy expanded em- was 3.1 percent compared to the annual average of
ployment opportunities by 1 pereent and the manu- 26.7 percent for the period 1970-77. In the most
facturing sector by 2.6 percent. By 1977 government recent years, 1973-77, the annual rate was 16.3
contributed 23 percent and manufacturing 19.5 per- pereent. The drug industry accounted for about 47
cent of total employment for the economy. percent of the sector's total profits in 1977, with
Contribution by the Manufacturing Sector.-Over- electric machinery in second place with about 16
view.-The manufacturing sector has played a major percent of profits. Between 1970 and 1977, the drug
role in the growth whieh has oecuITed. Manufactur- industry's profits grew 958 pereent, while total sector
ing has substantial!y inereased its share of nominal profits grew 512 percent.
net domeSJtic ineome from 15 pereent in 1950 to 34 The ratio of profits to GDP for the whole manu-
percent in 1977. During the period, the annual factnring sector was 22 percent in 1977 compared
growth rate of total ineome was lOA pereent, while to 25 pereent in 1967, while for drugsalone the
for the manufacturing sector it was 13.7 pereent. In ratio increased from 2 percent to 10 percent in the
the deeade 1950-60, manufaoturing ineome ad- same periodo Net profits per employee increased
vaneed at an annual rate of 12.5 pereent, eompared from $32,159 to $40,649 in the drug industry and
to 8.1 percent for other sectors. The share of manu- from $9,740 to $12,947 in the electric machinery
faeturing in total production rose from 15 pereent industry during FY 1975, notwithstanding the reces-
to 21 pereent. In the deeade 1960-70, the differenee sion in Puerto Rican economic activity. For the sec-
between the annual growth rate for manufaeturing tor as a whole, net profits per employee increased
(12.7 pereent) and that of other sectors (11.4 pereent) from $6,239 to $12,028 (a 25.5 percent annual rate)
diminished, with the result that the ratio of manufae- over the recession and partial recovery period
turing to net domestic income rose by only 3 percent, 1974-77.
to 24 pereent. For the period 1970-74, manufae- The gap between GDP and GNP was about 23
turing net ineome eontinued to advanee at a high percent by 1977, c1early indicating the transfer of
rate of 17 pereent, reaching 28.6 pereent of net do- profits off the island. The funds generated on the
mestie ineome by 1974 and 34 pereent in 1977. The islancl have financed to sorne extent new investment.
growth of sectoral ineome at the height of the reees- reducing the necessity of bringing new funds to the
sion in FY 1975 was 7.3 pereent as compared to the island, as well as investment in Puerto Riean Gov-
annualaverage rate of 14.6 percent in the period ernment securities. Although the balance of payments
1970-77. treatment of capital flows could involve sorne double

counting, there is little doubt that investment in off- 1960-70. This reduction oí sector employment was
shore securities was substantial prior to the revision largely compensated by an expansion of textile and
of section 931 in 1976. apparel industries, which, despite their basically
Wage Contribution.-For the manuíacturing sec- labor-intensive character, operated with more capital
tor, wages and supplements have sharply declined per worker. However, sorne segments oí the apparel
relative to the manuíacturing sector's contribution to industry could not cop with increased wage costs.
GDP íormation. The ratio of wages and supplements The output oí the handkerchieí and glove industries
to sectoral GDP declined írom 52.5 percent to 34.7 íell írom $25 million in 1950 to $5 million by 1971.
percent between 1969 and 1977. Moreover, the ratio The process oí change írom labor-intensive oto
of wages and supplements to sectoral profits moved capital-intensive industries has proceeded uninter-
from 189 percent in 1969 to 67 percent in 1977. ruptedly with impressive gains in manuíacturing ex-
Excluding the pharmaceutical industry írom the cal- ports, net income, and employment except in the
culation, the ratio oí wages to profit íor 1977 is about 1975-76 recession periodo The effectiveness oí the
100 percent as opposed to the 67 percent sectorwide industrial development program in attracting new
figure. The íaster growth oí profits relative to wages industries has generally been sufficient to offset plant
demonstrates in part the slow growth in overall sec- closings due partly to rising labor costs. A significant
toral employment. These íactors imply a shift toward portion oí these new industries were able to afford
capital-intensive industries. This shiít is consistent rising labor costs. For example, net income generated
with the expressed desire in Puerto Rico to attract in the chemicals and allied products industry ex-
industries that have higher technology and greater panded írom $9.9 million in 1960 to $110.4 million
capacity to pay higher wages, and demonstrate long- in 1970. In 1970, this industry was paying an aver-
term competitiveness which will not be easily dupli- age wage rate oí $2.26 or about 19 percent aboye
cated in LDC's. the sector's average and about 33 percent higher
than the apparel industry. By 1976, the chemical
Recovery from Recession.-Manuíacturing output industry paid an even higher wage rate ($3.90),
increased by 16 percent in 1977 and was led by a which was 36 percent higher than the sector's aver-
substantial increase in exports oí 38 percent (in age oí $2.86, and about 67 percent higher than the
nominal terms). Sectoral net income rose 19 percent apparel industry. Professional and scientific instru-
in 1977 over 1976, while employment increased in ments plants which EDA had attracted could like-
absolute terms by 11,000 jobs with chemicals, in- wise pay higher wage rates than the apparel industry
struments, and electric machinery industries pro- by 1976.
viding 90 percent oí the new employment. Through In 1970, the traditional, labor-intensive industries
the first 9 months oí FY 1978 an additional 3,000 still constituted the most important element oí the
jobs were apparentIy created in the sector. More- manuíacturing sector, generating about 49 percent
over, output appears to be growing at an annual rate oí total sector employment and 33 percent of total
oí about 9 percent in real terms. Thus, the recovery sector net income. By 1976, these industries had
appears to be taking place nicely, despite the slow- increased their relative share oí employment (about
down in investment during calendar 1977, which 55 percent), but suffered a decline in their relative
may have been attributable to investor uncertainty share oí net sectoral income (about 31 percent).
over revisions in the Puerto Rican incentives law.
In 1977, the nontraditional industries registered a
Changing Characteristics of the Sector.-The ex- sharp gain in net income oí 34 percent, surpassing
traordinary growth oí the manuíacturing sector in the rest oí the sector. Moreover, employment in these
Puerto Rico has been accompanied by a process oí industries recovered strongly, increasing sorne 13
structural change. The rapid increases in the wage percent and representing 95 percent oí the employ-
rates and íringe benefits have been the underlying ment increase for the whole sector. The expansion in
forces behind changes in the composition oí manu- net income of nontraditional industries was mainly
íacturing output and employment. The changes have related to advances in the chemicals and electrical
basically consisted oí the disappearance or decline oí machinery sectors, which compensated for the con-
labor-intensive industries, which has to a great de- tinued decline in the petroleum and cement indus-
gree been offset by the creation and rapid develop- tries. The latter were affected by high-cost raw ma-
ment oí industries with a higher capital/labor ratio. terials and the crisis in the construction industry.
This process has operated since inception oí the in-
dustrial development programo For example, the Competitive Position of Puerto Rican
home needlework industry, which employed 51,000
persons in 1950 and represented 48 percent of the
manuíacturing work force, declined to 10,000 per- Competitive Factors in Relation to Non-V.s.
sons by 1960 and virtually disappeared in the decade Producers.-An analysis of costs and benefits of a

manufacturing plant location in Puerto Rico com- equity investment before taxes was about 37 per-
pared to foreign countries is very complex. No con- cent in Puerto Rico and about 22 percent in the
clusive results have been discovered in this study, United States. After taxes, the Puerto Rico based
and further study should be undertaken. operation had a return about three times higher than
The decision to invest in Puerto Rico as opposed the U.S. operation.
to other areas is generally dependent on profit ex- The accelerated pace of wage increases in Puerto
pectations and the evaluation of risks related to the Rico has significantly eroded the wage dill'erential in
decision. First, for many labor-intensive industries, favor oí Puerto Rico,. The average manufacturing
a Puerto Rico location suffers from a significant wage rate in Puerto Rico increased from 44 percent
wage cost disadvantage in relation to most third of the Mississippi wage rate in 1949 to 72 percent
world countries (assuming productivity is similar for in 1970 because the' Puerto Rico manufacturing
these industries). For example, in the apparel indus- wages were advancing at a much faster annual rate
try, a comparison of hourly wage rates with certain (6.9 percent) than in Mississippi (4.5 peréent). In
Latin American and Asian countries shows Puerto the apparel industry, the relative labor cost ad-
Rican wage rates 2 to 14 times higher. vantage experienced an ever greater erosion in the
While Puerto Rico is at an apparent disadvantage period 1949-70. The Puerto Rican wage rate in
in terms of labor costs, this is balanced to sorne this sector increased from 35 percent to 93 percent
extent by the competitive advantage enjoyed by of the Mississippi wage rate during 1949-70. Since
Puerto Rico due to the absence oi tariff barriers on 1970, the Puerto Rican wage rate in the appare!
Puerto Rican goods exported to the U.S. market. industry has increased about 3 percent annual1y in
Puerto Rico probably has transport cost advantages nominal terms. Overall, the average wage rate in
(to the United States) in relation to sorne few coun- Puerto Rican manufacturing increased 8.2 percent
tries such as the Dominican Republic, 2 but for most in the periO'd 1971 to 1976, while in the United
other third world countries transport costs may act States manufacturing average wages increased 9.5
as a disadvantage to a Puerto Rican plant location. percent in nominal terms. The widening absolute
Other factors which seem to favor Puerto Rico gap in wage levels between Puerto Rico and the
relative to third world countries are: United States is the result of a lower base on the
(1) Puerto Rico has a long traditiO'n of pO'litical island against which the percentage change is cal-
stability and democracy; culated. Thus, it appears that Puerto Rico has not
(2) Investment in PuertO' Rico is not subject to improved its position relative to the United States
the risks O'i currency devaluation, import and ex- in recent years.
change controls, or confiscation of property without Other costs, such as energy and transport, tend to
adequate compensation; impact on Puerto Rico more heavily than mainland
(3) Manufacturing plants in Puerto Rico are not industrial locations. The energy cost differential be-
subject to the risk of U .S. tarill' increases or imposi- tween Puerto Rico and the Sunbelt States seems to
tion of nontariff barriers; vary in the range of 60 percent (Hawaii) to 190 per-
(4) Puerto RicO' has a relatively well trained and cent (Louisiana).
stable work force.
Competitive Factors in Relation to U.S. Producers. Industrial Incentives Act and U.S. Tax
-During the early years of the industrialization Exemption
program, PuertO' RicO' offered potential manufactur- The Industrial Incentives Act (HA) of 1948 con-
ing investors the advantage of low wage rates, which stituted the principal policy instrument used by the
were associated with the special treatment given to Puerto Ricans to attract U.S. firms to the island. The
Puerto Rico in the Federal minimum wage law. The act, among other things, oll'ered time-limited exemp-
hourly wage rate in promoted industries was 29.9 tions from Puerto Rican profit taxes, which, con-
percent of the U.S. average and 44.3 percent of the joined with section 931 of the Federal IRS Tax
wage rate in Mississippi in 1949. MO'reover, in the Code, essentially permitted tax-free operations on
apparel and related products industry, the Puerto the island. The 1948 HA provided for a 10-year
Rican wage rate was $.30 in 1949, equal to about exemption period from Puerto Rican corporate in-
35 percent of the Mississippi rate and 24 percent of come taxes, property taxes, and excise taxes on en-
the U.S. average. As a resnlt oí the labO'r cost terprises engaged in the production of new manufac-
advantage, the rate of retum on equity befare taxes tured products. The 931 corporations were allowed
was substantial1y higher in prO'moted industries to exclude from gross income all foreign income, in-
operating in Puerto Rico compared to those operat- cluding Puerto Rican source income, if they met the
in the United States. In 1956, the rate of return on following requirements: (1) 80 percent or more of
11 Source: Puerto Rican Maritime Autbority Study, 1976. gross income was derived from sources within Puerto

I Rico and/ar a possession of the United States; and
(2) at least 50 percent of gross income carne from
the tax liability of corporations operating on the
island. The eventual need of graduating corporations

the active conduct of a trade or business therein.
A U.S. company desiring to establish a plant in
Puerto Rico could operate through a section 931
from tax exemption to a taxable status is an im-
portant step which recognizes the structural changes
taking place in the last 15 years in this sector.
subsidiary corporation, thus ¡lvoiding the payment of
Federal income tax on Puerto Rican net income until Nontax Factors in Puerto Rican Support
distributed by the subsidiary to the parent company. of Industrialization
This special treatment under Federal tax legislation
allowed the section 931 subsidiary to avoid the In addition to the tax exemption, Puerto Rico
payment of Federal corporate taxes during the whole offers a variety of incentives designed to attract
Puerto Rican-granted exemption period, provided manufacturing firms including: Worker training and
earnings were not repatriated to the parent on a other technical assistance; construction and subsi-
current basis. Furthermore, if the section 931 sub- dized rental of industrial buildings; capital grants or
sidiary were liquidated at the end of the exemption "special incentives" related to the location of plants
period, the accumulated eamings of the subsidiary and number of workers employed by new plants;
would be transferred to the parent without the im- direct loans from the Government Development
position of any Federal income tax, under the Inter- Bank and to a much lesser extent the Puerto Rican
nal Revenue Code, section 332. Liquidation was also Industrial Development Company (PRIDCO); and
tax free under Puerto Rican law. payroll subsidies.
The effect of the Puerto Rican tax exemption was In the construction and rental of industrial build-
in practice approximately to double the after-tax ings far the period 1942-77, nearly 1,307 industrial
rate of the return on investment by U.S. corpora- buildings were constructed by PRIDCO, with a to-
tions through a section 931 subsidiary in Puerto tal area of 22.4 million square feet at a cost of about
Rico. Therefore, as long as manufacturing enter- $200 million in current prices. Rents charged on
prises could operate with an acceptable rate of profit standard industrial bniIdings constructed by PRID-
(including the illegal possibility of shifting profit CO are about 40 percent below rents on privately
through transfer pricing) in Puerto Rico, then the owned buildings. Land and bniIding rental in
tax exemption under the nA was a powerful in- PRIDCO industrial parks appears to be priced be-
ducement to locate in Puerto Rico. low most comparable factory locations in the States.
Even in the recession of 1975, tax exemption re-
presented a benefit of $414.8 million for the section Under capital grants, the maximum grant for the
931 subsidiaries operating with profit. The accumu- first 30 workers is about $10,000, while in the
lated value of the tax exemption (under the HA) underdeveloped areas the grant is about $30,000.
for the period 1948-77 amounted to about $3,300 PRIDCO has disbursed a total of about $38 niillion
million. between 1951 and June 1977 to assist industrialists
The tax exemption incentive has been enhanced in defraying costs of machinery, transportation,
over the years by the Puerto Rican Legislature and special installations, employee training prógrams,
recently by the U .S. Congress. In 1961 the Puerto rentals, electricity costs, and other items.
Rican Government reviewed the nA, extending to Direct loan prograrns have been more modest in
13 years (from 10 years) the period of exemption Puerto Rico than in sorne of the States of the Union.
for manufacturing plants located outside the San At the end of fiscal year 1977, the industrial loan
Juan metropolitan area. In 1963 the new Industrial portfolio of the Government Development Bank and
Incentives Act established 10-year, 12-year, and 17- PRIDCO arnounted to about $130 million, which
year geographic zones for exemption periods. represented a small portion of the total industrial
The recent change in the Federal tax code em- investment of about $12 billion. Industrial revenue
bodied in section 936 of the 1976 tax reform law bonds have not been used in Puerto Rico to finance
was a positive U .S. action which encouraged section industrial development.
931 corporations to place funds in Puerto Rican
assets, at the sarne time allowing them to repatriate Sources of Invesfment
dividends free of U.S. income tax on a current basis.
The revisions in the law should benefit Puerto Rico Investment in the manufacturing sector has been
by permitting it to capture through taxation (toll- financed essentially from external sources-approxi-
gate taxes) some portion of repatriated earnings. The mately 90 percent has come from maiuland U.S.
proposed revisions by the Romero Administration firms. Most Puerto Rican units of U .S. companies
of the Puerto Rican Incentive Act, enacted into law are import/ export production facilities operated un-
in June 1978, moved in the direction of increasing der parent company management decisions taken

within !he context of a total worldwide market and in leakages from the economy or a slight increase of
produetion orientation. This entrepot funetion has, the ineome multiplier.
essentially, limited Puerto Riean production to meet- The heavy dependence on external investment,
ing needs within the continental market, making the eoupled with apparent insufficient linkages, has re-
sector dependent on !he market situation in the sulted in a situation in which !he very large increases
United States. in output produced on !he island do not result in
It appears that future Puerto Riean development corresponding increases in ineome aceruing to Puer-
will continue to depend on long-term external capi- to Rico. There is a widening disparity between in-
tal infiows to maintain a strong growth trend. This creased output and Puerto Riean ineome genera-
inflow rests heavily on continued facilitation by Fed- tion, with Puerto Riean ineome per unity of output
eral tax aetions and policies. To the extent that the falling. GDP exceeded GNP by $2 billion in 1977.
Cornmonwealth can stimulate employment growth GNP as a percentage of GDP has fallen eontinu-
and expand its tax base to finance further economic ously throughout the period 1947 to 1977, dropping
and social infrastrueture, the complementary Fed- from 107 pereent in 1947 to 81 percent in 1977.
eral Government efforts can assist Puerto Rico in High unemployment is a persistent charaeteristic
inereasing the well-being of the island's people. of the eeonomy. The rate of net job ereation, there-
fore, appears insufficient to meet existing labor
Problems and ShortfaIls supply which apparentIy is enlarged by recent re-
turn migration. This eould imply a greater need for
In tbe Overall Econorny.-The laek of natural re- expansion in employment oppmtunities preferably
sourees, the shortage of local capital, and the rela- in the productive and service sectors. Transfer pay-
tively small size of the local market have made ments relative to personal ineome have tended to
Puerto Rieo's eeonomie development highly de- increase reducing the social ill effects of unemploy-
pendent upon an infiow of external resources and ment, but not solving !he long-term problem of
upon produetion for the export market. The extent employment creation. Out-migration to the main-
of this dependence has increased as eeonomic growth land may arise in the future to alleviate the problem
has proceeded. For example, net inflow of capital at the risk of losing talented people whose contribu-
in 1975 was $2.2 billion, 85 pereent of aggregate tion to the island's economy would be sorely needed.
investment financing available as compared with There are wide variations in produetivity among
35 pereent in 1950. About 70 percent of Puerto the seetors as shown by the faet, that, despite the
Rico's national income is spent on imports. Mer- large reduetion in employment in agriculture in-
ehandise exports were 46.9 pereent of GDP in 1977 creased by 345 percen! from 1948 to 1976 as com-
as eompared with 33.6 pereent in 1950. Net Federal pared with an increase of 326 percent in manu-
Government transfers to Puerto Rico were about faetnring. Output per employee inagriculture was
$2.4 billion in 1977, about 25 percent of GDP. The 30 percent of that in manufaeturing in 1948. By
extent of the manufaeturing sector's dependenee on 1976, it had increased to only 31 pereen!.
external investment is shown by the faet that in
The economy is characterized by high consump-
1973 external stockholders' equity in nine indus-
tion and low savings. The propensity to consume is
tries was 98.3 pereent of total equity (e.g., 99.988
shown as being greater than one in some years. Per-
percent for pharmaceuticals, 99.98 percent fm pe-
sonal consumption expenditures in recent years have
trochemieals, and 98.9 percent for electrical ma-
exceeded GNP. Net domestic savings appear to be
ehinery). These nine industries produeed over 57
virtually zero since the mid-1960's.
pereent of manufacturing output in 1977.
This dependence is probably characteristic of a In tbe Manufactnring Sector.-The manufactur-
SIDall eeonomy with limited resourees, and, like any ing sector has made major contributions to the eco-
other subnational jurisdiction, Puerto Rico does not nomic growth which has occurred. However, it ex-
have available to it the usual national tools of mone- hibits certain weaknesses and there appear to be
tary, trade, and exchange policies. This gives rise to limitations on the contribution it can make in rela-
high "leakages" with consequent low "multiplier" tion to the magnitude of the problems faced by
effects from increased produetion and ineome. It Puerto Rico.
also makes the eeonomy highly vulnerable to the The large volume of external investment fiowing
risk of changes in external economic conditions, into the sector and the accompanying large increases
ehanges in Federal programs and policies, and in output are falling short of generating desired em-
Puerto Rico's position in the U.S. Federal system. ployment.
Linkages among the seetors, and especially be- Manufaeturing employment increased by 79 per-
tween !he manufacturing and other sectors, have cent from 1949 to 1963; by 55 pereent from 1963
been growing slowly. This implies sorne reduetion to 1973, and fell 5.6 pereent from 1973 to 1977;

the latter decline is refiective of the incomplete re- more recent periods shows that forward linkages, as
covery from the recession. The decline in employ- measured by the ratio of interindustry sales to total
ment may be in part due to the effects of recession shipments, improved somewhat from 1963 to 1972.
in labor-intensive industries. However, the growth The analysis also shows that Puerto Rico became
in manufacturing output was retarded by the reces- less dependent on imported materials during that
sion in 1975 and has since begun to recover quite period, implying that backward linkages increased
rapidly with 1978 real growth expected to be about slightly. Limited development of backward linkage
9 percent. could arise out of a combination of circumstanc~s,
The total number of jobs .created by manufactur- including a shortage of natural resources, low capital
ing has been smalI in relation to the unemployment accumulation in Puerto Rico, its re1ationship to the
problems of the economy. From 1950 to the peak in U .S. market, and the predominance in the sector of
1974, the manufacturing sector produced 92,000 net mainland parent-Puerto Rican subsidiary relation-
additional jobs, an average increase of 3,833 jobs a ships in production, c1istribution, and financial rela-
year. An average of 5,000 new jobs ayear was cre- tionships.
ated in each of the periods 1960-65 and 1965-70. Production for Ihe local market is relatively small
During the highest period, 1964-69, net additions with imports supplying a large portion oí local de-
to employment amounted to 8,200 ayear. An in- mand both for prooducts for final consumption locally
crease of 5,000 jobs ayear represents only Y:í7th of and products entering into productioon for exporto
reported unemployment in 1977 and 8,200 ayear The scarcity of resources and the limited size oí Ihe
amounts to only about Y:,3d. The tata! fOTce in- local market dictate that greater expansion oof the
creased by almost 11,000 ayear from 196(}-65, manufacturing sector must depend heavily upon inter-
about 17,000 ayear from 1965-70, and about mediate goods imports and production for the export
22,800 ayear from 197(}-77. These data take no market. Analysis made in this study indicates that
account oí what appears to be a low labor force there are three types of industry situations which are
participation rate (about 41 percent compared with deserving of explooration for possible efforts to ex-
a U.S. mainland rate oí about 62 percent). Thus, pand production for the local market. First, there are
. it wonld appear that the manufacturing sector can- Ihose industries for which the size of local demand
not be counted on to solve in a majar way the for final consumption, the volume of imports, and
overal! employment problem. Indirect effects of di- economies oí scale sugges,t that increased local pro-
rect investment are limited by a low multiplier (a duction foor the local market is likely to be feasible.
low level of backward or forward linkages) and Examples are certain food products (milk products,
induced investment resulting from the direct invest- bakery products, fmit and vegetable canning, heer),
ment appears low to meet total employment require- packaging and containers, and rubber products. Sec-
ments of the economy. Yet it would be desirable to ond, there are indnstries which the evidence suggests
establish explicit direct and indirect employment (but available data and the scope of this study are
targets for the sector to guide promotion activities. inadequate to permit firm conclnsions) may offer
Present1y, Fomento uses informal employment potential for prodnction of intermediate products.
guidelines as one criteria in its promotion activities. Certain textile milI produots are examples. Final!y,
Since the present direction of development is there are sorne industries which a priori seem to be
highly dependent upon external investment and Fed- suitable candidates for efforts to expand local pro-
eral, as wel! as local, tax exemption; vulnerability duction, but for which evidence available is insuffi-
to changes in the corporate and investment policy cient to permit any immediate conclusion. These in-
of external investors and to changes in governmental elude furniture, packaging and containers, and glass
tax policy is exacerbated. Some parts of the sector products.
are sensitive to the changes in U.S. trade policies
which reduce restrictions on imports from low-wage In fue Incentives System.-Exemption from tbe
economies. Corporate investment and production Federal corporate income tax in combination with a
decisions, materials supply, and product distribu- plentiful supply of relatively low-wage-rate labor has
tion systems are almost entirely related to policies. been the major factor in bringing about the very
practices, and financial, and tax considerations of large volume oí externa! investment in manufactur-
mainland parent corporations with little infiuence ing industries in Puerto Rico. The Puerto Rican in-
from Puerto Rican economic forces. centives program, especialIy exemption from Com-
Linkages within the sector and with other sectors monwea1th taxes, has also been a significant factor.
are limited. Earlier studies show that prior to 1963 If present cost and profit c1ifferentials between the
industries in Puerto Rico were engaged primarily in island and mainland narrow, exemption from Federal
processing semifinished materials into export items income taxes and tax concessions from Puerto Rico
in a form still short oí final product. Analysis of may become even more important. The nature of

industries now locating in PueDto Rico suggests that various industries; (b) provision of sueh benefits is
such exemptions may have come to be the primary conditioned and constrained by a number of factors;
factor in leading industries to lacate there. Nonethe- and (e) there are variations in the degree a,f risk or
less, the past system has a number of problems in- vulnerability to Puerto Rico involved in difierent
herent in it: directions or emphases in the deve]opment of the
internal composition or stmcture Oof the manufactur-
a. It provides only limited means for influencing ing sector. Variations arise from such factors as the
priorities in ·the direction of investment, the nature characteristics of individual industries, profit leve]s,
of industries to be established, or the fashion in comparative mtes of profits as between the island
which the factors are combined. and the mainland, market and demand conditions,
b. It tends to reinforce the natural tendencies for and the nature Oof investment incentives utilized.
mainland parent eompanies to arrange intercorporate
Subject to the Iimitations and qualificatiOons stated
decisions, transactions, produotion and distribrnion
in the fir~t paragraph aboye, the following findings
systems, and fund flows in a way whieh will maxi-
also emerge from that analysis:
mize overall eompany objeetives.
c. It tends to impair theability of the manufactur- 1. In general the highest output per unít Oof invest-
ing sector to perform the normal functions of serving ment is produced by the more cap1tal-intensive indus-
as a souree of governmental revenues and of aceurnu- tries. (These industries embody the most modern
lation of capital for investment in the economy in available technology and organizational systems in
which it operates. the capital investment made on the island.) Rowever,
d. It introduces an element of uncertainty iuto it may be inadequate in meeting employment or
consideration of investment decisions since status other policy goals.
after the exemption period is unknown. This may 2. Capltal-intensive industries or industries with
dert:er sorne investment and tend to develop a sector regulated monopolies, in contributing to increased
of more or less transitory industries, that is, firms Puerto Rican factor incomes, usually have to:
which come in, operate for the exemption period,
and then move out. To the extent that there is such a. Rave substantial export market;
a tendeney, it, in turn, inrt:ensifies the tendeney to- b. obtain relatively skilled labor, and/or
ward a nonintegrated secto·r. c. have enough pro-fits to pay taxes.
The recently enacted Puerto Rican legislation moves Industries falling into this category inc1ude:
in the direction of the removal of these deficiencies.
Significant Differences Among Indnstries Petrochemicals
Petroleurn and refinery products
The comparative analysis made of industry groups Professional and scientific instruments
is based on fragmentary and to sorne extent noncom-
parable data. It utilizes proxies which may bias re- Electrical maehinery
sults. It is also incomplete and leaves out many fac- N onel ectrical machinery.
tors which must be taken into aecount in formulating Pro-fit rates for these industries tend to be high.
governmental poliey toward, and programs afleeting, Except for petroleurn refining and products and pos-
the manufactnring seotor. The analysis is, in many sibly petrochemicals, whose location in Puerto Rico
cases, too aggregated and needs to be carried to 3- has been erutirely dependent upon special favorable
and, perhaps in sorne cases, 4-digit SIC codes fer price arrangements for foreign oil which have now
sorne industries. As a result, it eannot serve as a disappeared, growth prospects for industries in this
basis for final policy and program formulation. It grOol1p appear to be good.
may, however, have signifieance for government pol-
icy in a number of ways. First, it points to specifie 3. Profit rates for industries in Puerto Rico tend
questions concerning current and prospective palicy to be higher than aftertax rates for the same indus-
which should be examined. Second, it indicates that tries Oon the mainland. This differential has been for
there are certain options as to sector policy, and many industries a primary reason fOor lacation in
taxation and incentive programs which should be Puerto Rico.
further explored. Third, it is suggestive of the kind of 4. The analysis indicates that irnpo'sition of a 20-
analysis whieh should be made, using more adequate percent corporate income tax would be Iikely to leave
data and methodology, to provide one basis fer policy aftertax profit rates in Puerto Rico higher for most
and program formulation. industries thalt sueh rates for those industries on the
The analysis demonstrates that (a) there are wide mainland. Exceptions might be sorne food products
variations in the benefits provided Puerto Rico by industries and furniture and possibly stone-clay-glass

and primary metals. It may also be troe or chemicals,
machinery, tobacco, fabricated metals, and paper
products if the low Puerto Rican profit rates for
[hose industries in 1975 were to continue.
It appears, however, that a corporate income tax
9. At present Federal loan and grant-in-aid pro-
grams impact only marginally on Puerto Rican
10. Federal program and Puerto Rican program
priorities are not c10sely related. Puerto Rico in
with an effective rate of 40 percent on profits eamed general must react rather than relate to Federal pol-
in Puerto Rico would significantiy change the rela- icy in advance.
tionship between Puerto Rican and malnland profit
rates (see chapter IV). The study uses these figures Summary
only illustral1:ively to analyze the impact of different
tax-rate levels. The analysis in the following chapters (III-V, VII,
5. Imposition of moderate corporate income taxes VIII, IX) is geared toward evaluating industries on
would be an effective way to increase Puerto Rican the basis of six major criteria: (1) local income,
income generated by some industries. Industries whether for labor or capital; (2) potential govem-
which offer the greatest potential in this regard are ment revenue generation; (3) employment creation;
pharmaceUlticals, by a large margin, and then ele<>- (4) Iinkage potential; (5) import substitution poten-
trical machinery to a significant but much lesser tial; and (6) long-terrn trade competitiveness. Other
extent. Also, instroments, machinery, and possibly factors in a qualitative sense are not ignored, but
apparel and beverages may offer sorne potential. require more sophisticated tools than presentiy avail-
able. For example, local entrepreneurial develop-
6. The vo~ume of employrnent rather than wage
ment, worker training and skill upgrading, wage
rates seems to be one determinant of an industry's
absorption capacity, market diversification, etc., are
contribUltion to Puerto Rican income. The very large
factors that should be more thoroughly evaluated by
spread between the more numerous lower wage, high-
Puerto Rican authorities. Survey benchmarking of
labor utilizing industries and the small nurnber of
lhese elements would provide a useful start in the
high-wage, capital-intensive industries and the grow-
ing size or the latter may, however, be bringing abaut development of a more quantitative evaluation ap-
proach. In any event, the analysis does take account
some structural shifts in the distribmion or worker
income. of the major factors impacting on Puerto Rico's
7. Wage rates in Puerto Rico were increasing
faster than rates on the mainland through 1970. In Furtherrnore, the study suggests that the problems
which policy needs to address are:
recent years the absolute spread between the two
has, however, widened somewhat because of the How to achieve a continuation and acce1eration
higher base for mainland rates. Wage rates in Puerto of the upward trend in growth of Puerto Rican in-
Rico have increased considerably faster than in other come, output, and employment.
foreign areas with which it competes. How to maintain the flow of external investment.
Minimum wage requirements have been a factor How to increase the income generation effect of
in the past in increasing wages in Puerto Rico. Pres- investment,in the sector which is a function of: (a)
ent legislation which will bring the Puerto Rican the nature of the industry in which the investment is
minimum to mainland minimum by 1981 may be made; (b) the potential for payment of Puerto Rican
quite important in that regard. Information available taxes; and (c) increased linkage and multiplier
indicates that in 1976, 38 percent of the work force effects.
had wages lower than the minimum established for How to reduce risk of vulnerability to changes in
J anuary 1978. Only petro1eum, chemicals, printing
external circumstances and in relationships within
and publishing, and machinery had average wage the Federal system.
rates higher than the minimum rate to become effec-
tive in 1981. Even if differentials between Puerto How to improve and maintain the competitive
Rican and mainland wage rates remain unchanged, position of Puerto Rican industry.
the effect on the rate of profit in Puerto Rico could Chart 1 summarizes the historical development
be substantial. Industries likely to be affected are, of and the present situation in the sector and illustrates
course, those with a high proportion of labor costs the nature of the problems faced. Probably the most
in total costs such as apparel, rubber and plastics, striking feature of the chart is the dramatic rise in
wood and furniture, and leather products. the output curve after 1971 and lhe failure of the
8. A combination of greatly increased wage levels labor in come and employment curves to follow that
and imposition of corporate income taxes would be rise. It may represent a period of "takeoff"· for a
Iikely to substantially reduce Puerto Rican profit nurnber of industries in the rate of increase in em-
rates. ployment and income.


MilllOn ji 1954 Mlllion $ 1954

1440 1440

1280 1280
640 640

PUERTO ruCAN DEVELOPMENT Finally, the study results suggest acceptance of the
STRATEGIES following assumptions as conditioning lhe possible
strategies that could be considered.
Strategies for dealing with lhe problems identified
1. Policy toward lhe manufacturing sector is to
are of two kinds. First, there are choices of the basic
be a part of an overall development policy which
policy or strategy to be followed for assisting the
emphasizes development of other sectors in addition
development of the manufacturing sector. Second,
to manufacturing. Such a policy seems to have been
there are various programmatic options relating to
adopted by the present government and is supported
lhe means to be used in carrying out the basic policy
by the analysis in the study.
option chosen. The implications of the study for each
type are surnmarized separately below. 2. Certain fundamental elements of past policy
toward manufacturing are sound and will be con-
tinued, including: (a) enhancement of Puerto Rico's
Objeetives and Assumptions Meeting Choice Federal relationship and its position as a part of the
There are a number of objectives to which the U.S. economy; and (b) primary reliances upon im-
development of the sector might be expected to con- ported materials and production for the export mar-
tribute. The relative weighting given lhem will condi- ket rather than following an exclusive "import sub-
tion lhe choice among basic policy options. From stitution" policy (but not precluding the possibility
that perspective, they might be considered as criteria of stimnlation of economic production for the local
for choice. Analyses contained in the study suggest market and increasing "linkages" where feasible)
that under Puerto Rican conditions, a set of reason- and similar reliance on external capital (but not to
able objectives or criteria are: the exclusion of altempts to stimulate local savings
and investment).
1. A sustained rate of growth in real GNP at
close to the historicallevels of the last 30 years. Given the aboye assumptions, the study suggests a
2. A reduction of unemployment in order to re- range of policy options is feasible for continued de-
duce the human, social, political, and economic costs velopment of the manufacturing sector.
of unemployment. In selecting the strategy the policymaker is con-
3. A sustained movement toward a paltern of fronted with a series of criteria bounded by the in-
income distribution which avoids a large concentra- vestor's selection of technology and the appropriate
tion of income in a small segment of the population. factor proportions. This lalter element is most ap-
4. Reduction in an efficient manner of vulnera- propriately measured by the capital/labor ratio
bility to changes in conditions not subject to Puerto (K/L). The amount of capital per employee is as-
Rican control, including: (a) corporate policy and surned to embody the technology package associated
financial considerations unrelated to Puerto Rican with the investment. Industries with a relatively high
economic conditions, and (b) changes in conditions K/L ratio have in recent years been attracted to
and the nature of relationships within the U.S. Fed- Puerto Rico. These industries have absorbed sub-
eral system. stantial labor, but given the size of the capital re-

r quirements increased labor absorption may be prob- Attracting these industries embodies in Ihe policy-
lematical. On the other hand, increased technical maker's decision an implicit ranking of the objectives
skills, higher wage and fringe benefits, and increased associated with the sector in an order in which the
investment are important contributions these indus- prime emphasis is on growth of sector producto The
tries bring to the island. The long-term competitive- investtnent increase which Ihe objective is designed
ness of these industries is another factor which ot obtain would, through direct and multiplier effects,
Puerto Rican policymakers consider in attracting Ihe raise GNP along with GDP, and expand domestic
industries to the island. income. However, the approach may lead to a large
In sum emphasis on attracting Ihese industries external ownership component and a further widen-
offers the following principal advantages: ing of the GDP-GNP gap. While employment in-
1. It is known and understood in Puerto Rico and creases result from this approach, the criterion of
in the mainland and has succeeded in attracting in- direct employment creation is subordinated to the
dustries to Puerto Rico. overall growth and income objectives.
2. It is now attracting high-profit industries whose Another strategy is one under which policy and
costs are relatively insensitive to wage rates and program emphasis would be placed on those indus-
which provide high output per worker. tries whose establishment makes the greatest imme-
3. The approach pro vides a means for upgrading diate contribution to employrnent creation and labor
skills and increasing productivity as measured by income. In general, these industries have a low rela-
output per worker. The higher skills tend to be tive K/L ratio. Because the flow of investment to
transferable. such industries is now slower than to the higher K/L
4. In the past 11 years, the capital-intensive in- industries, selective program support in the nature of
dustries have provided the increase in employment favorable financing and subsidization of labor ex-
generated in the manufacturing sector. penditures would be relied on to supplement the
5. The opportunities for downstreaming and in- normally available tax-exemption inducements.
creased linkage effects could be enhanced by Ihe There are a number of advantages associated with
capital-intensive industries. In recent years Puerto this approach. Among them are:
Rico has not c1early benefitted from linkage develop- 1. If successful, it would in the short run stimulate
ment, but these industries are expected to establish more employment and labor income than would a
greater local ties over the medium termo policy strictly emphasizing growth in output, and so
6. The high-profit, capital-intensive industries pro- would be more directly responsive to the problem of
vide a strong base for Puerto Rico to expand its Puerto Rico's current high unemployment.
revenues through the potential of corporate taxes, 2. It would tend to build a sector structure con-
Ihereby increasing the island's capacity to maintain sistent with Puerto Rico's supply of abundant and
infrastructure and undertake needed social invest- relatively inexp~nsive labor (relative to the main-
ments without increasing reliance on outlays of Fed- land) .
eral funds. 3. The resulting structure would be somewhat less
However, there may be sorne disadvantages for vulnerable to changed Puerto Rican/Federal rela-
the island's economy. Among these may be: tionships.
1. The ability of the approach to generate large 4. Because of the generally lesser amounts of
increases in Puerto Rican employment in the near capital required for investment in labor-intensive
term is limited because of Ihe capital-intensive char- enterprises, there would be greater scope for Puerto
acter of new investment. Rican investors to acquire ownership of capital, and
2. Direct Puerto Rican income is largely confined for Puerto Rico to share more fully in direct manu-
to that derived from the labor component of output, facturing income going to property.
and the return to property would essentially still However, there are a number of disadvantages
flow off the island because of continued external associated with the approach. Among them are:
3. It may involve a tendency in the long run 1. Industries to be emphasized are generally not
toward concentrating direct income to Puerto Rico those wilh Ihe highest prospects for market growth,
in the hands of a relatively small and skilled labor particularly for exporto The demand for labor-
group. intensive products might limi! the ability of these
4. The approach is very dependent on the use of industries to grow sufficiently to absorb available
the tax exemption to attract needed heavy flows of labor supply. Special market promotion efforts might
foreign savings for investment and is, accordingly, have to be undertaken to strengthen demando
vulnerable to risks of change in the nature of Puerto 2. It probably would need extra supporting ac-
Rico's position within the Federal system. tions, in the form of subsidies and possibly with

respeet to seeking changes in minimum wage legis- 2. A doption of a difJerentiated incentives sys-
lation. These actions may be costly or difficult to tem.-This option would recognize that tbere are
effect. wide variations among industries in terms of tbeir
3. It might be difficult to obtain business accept- benefits to Puerto Rico and within the conditions
ance of the differential program treatment required, that make possible or constrain their ability to pro-
and the potential investment of SOme capital- duce such benefits. As an alternative to tbe present
intensive firms might be discouraged. largely undifferentiated system, tbere can be con-
4. The low-grade technology does not offer a sidered a system which differentiates incentives
good opportunity for upgrading skills and increasing treatment by c1asses of industry. The system could
worker productivity, nor does the slower produc- operate through direct subsidies, such as, grauts to
tivity growth associated with these industries permit companies to support employment or wage goals or
tbe real wage rate to rise as fast as in tbe capital- through otber grant programs normally associated
intensive sectors. with PRIDCO. The outlines of such a system and
the additional data needed for fuI! development of it
5. The prospects for linkage development among are presented in chapter IV.
most labor-intensive industries are relatively limited. 3. Adoption of a limited import substitution pro-
The implications of fulfilling these policy goals re- gram.-Even with continued emphasis on export-
fiect a concern to increase tbe domestic income of based industries, a policy which emphasizes the local
the island relative to the growth of gross domestic production of selected commodities which can be
income. A lower K/L ratio, given the island's reli- efficiently and economically produced for local con-
ance on external investment and its relative abun- sumption or for incorporation into exports is an
dance of labor, would probably lead to increases in option. Chapter VIII identifies industry possibilities
labor's share of income, at least in tbe short termo in this respect and discusses the government action
Witb capital income as a smaller share of total which would be required for their promotion.
manufacturing income, given the present ownership Decisions with respect to al! of tbe options are
structure .of the sector, the difference between the hampered by a substantial lack of data. In tbe con-
GDP and tbe GNP of Puerto Rico would tend to duct of this study it has been noted that it would be
narrow. In the implicit ranking oí sector objectives useful particularly to have additional data with re-
under this approach, growth of manufacturing out- spect to tbe section as a whole, as well as for sep-
put is given a tertiary position. Employment is the arate industries: investment fiows, capital stock, cur-
prime objective, followed by tbe objective of narrow- rent hourly wages, final sales, unit-cost estimates,
ing the GDP-GNP gap. capital utilization measures, and intraindustry pur-
chases and import components of final sales, which
Programmatic or Supporting Options would in part resuJt from an updating of the input-
output data. This lack of data exists at both the
A number of programmatic options are available macro and micro leve! and requires consideration of
for consideration by tbe Puerto Rican Government. instituting an expanded and continuing program of
Because they are in tbe nature of policy instruments data col!ection, research, and analysis. The data
tbey can be considered for use witbout regard to should allow for better program and policy formu-
which overall strategic approach they may apply. lation and a base for evaluation of policies in tbe
They may support one or the other strategic ap- sector.
proach. However, the programmatic options covered
by tbe study are not necessarily complementary, and
choice must be involved in considering tbem in any FEDERAL GOVERNMENT OPTIONS
combination as support measures for carrying out
a strategic approach. Federal Government options are in tbe nature of
The programmatic options inc1ude: decisions abóut program content and size, rather
than choices among aJtemative programs. The Pos-
1. Adoption of a minimum current profits tax for sessions Corporation System of Taxation under
manufacturing corporations.-This option, devel- section 936 is of central importance to continued
oped in appendix A, applies particularly to the con- Puerto Rican industrial development. Aside from
cern about keeping promoted firms in operation on section 936, however, existing Federal Govemment
tbe island after the period of tbeir tax exemption. programs have olliy a marginal impact on industrial
Appendix A can be considered from the standpoint development. There are few programs of a direct
of effectiveness in retaining firms and at the same support character devoted to industrial develop-
time expanding and retaining a corporate tax base ment. Since, except for section 936, Federal pro-
that could yield significant revenue. grams have broad applicability among States and

territories, decisions with respect to ccntent and size Rico in consideration of US. trade policy and grant-
are independent of basic policy options chosen by ing of trade concessions.
Puerto Rico. Actions which lhe Federal Govern- 3. To lhe extent possible under statutory limits,
ment might take are in general more related to other taking account of differences between the island and
parts of the Puerto Rican economy than to lhe man- lhe mainland in applying regulatory requirements.
ufacturing sector. There are, however, some general 4. Efforts to include Puerto Rico in regular U .S.
actions which might be taken which would be help- statistical series where Puerto Rico is not now fuU)"
ful effects on the development of the sector: included. Provision of assistance to Puerto Ri<;o
(both long-term and short-term as well as tempo-
1. Coordinating more closely Federal programs rary duty assigrnnents of mainland advisers) in re-
to Puerto Rican priorities. viewing its economic data galhering, research, analy-
2. Full recognition of lhe impacts: on Puerto sis, and reporting systems.

Chapter II. - Economic Conditions,
Development Strategy, and Policy
FACTORS AFFECTING SECTOR hand, may mean that the winds and the ocean may
make pollution less of a factor.
Sector Role Puerto Rico's location, 1,000 miles from Miami,
and the fact that it is an island adds to its transporta-
A funct10n of the manufacturing sector in an tion costs in relation to maiuland U.S. markets and
eeonomy is to provide a diversified and balanced produeers and means that transportation between it
economic structure and ,thereby reduce the economy's and major markets and sources of supply must be
I vnlnerability to wide fluctuations of a single product by sea or air.
I eeonomy as Puerto Rico's was through the early
1950's An increase in the economie well-being of Resource Base.-.-The island is deficient in most

I the population is thereby effected through employ-

ment opportunities,' as well as a more equitable dis-
tribution oi the income from economic growth.
natural resources. The principal mineral resources
are c1ays, salt, sand and gravel, and stone. The only
metabolic minerals available are very small quanti-
The extent to which and the way in which a sector ties Df iron ore and sorne copper and meke! which
serves such purposes will be affected by the condi- are not yet being exploited. A 1965 report oi explora-
tions which exist in the economy and by pDlicies and tion suggested that an annual produetiDn of 70 tDns
actions Df the government and financial institutions. of copper for possibly more than 30 years rnight be
feasible. Sorne consideratiDn is now being given to
exploration of this deposLt. N o petroleurn or natural
Elements Impacting on the Role and gas deposits have been located, resulting in the need
Functions of tbe Sector to import energy at relatively high costs and the lack
A number oi factors inherent in Puerto Rico's of locally available raw rnaterials on which to base
situation condition the role which manufacturing can the petrochemicals industry. There is now sorne sug-
play in the economy and the ex!l:ent to which it per- gestion of offshore deposits, but whether, even if
forros these functions. there are such deposits, they would be a Puerto Rican
rather than a Federal resource is apen to serious
Size and Location.-Puerto Rico is small with a question. The overall supply of water appears to be
land area of about 3,400 square miles, about 2.2 adequate but there are problerns of 10catiDn and utili-
million acres. Much of this area is mÜ'untainous. The zatiÜ'n of supplies so thalt conservation rneasures are
U.S. Soil Conservation Service has estimated that not needed.
more than 40 pereent of the total area contains soils In summarizing the limited natural resonrce base,
which are suitable for cultivation and that much Df the Puerto Rican Economie Development Adrninis-
this wÜ'uld have to be subjected tÜ' intensive conserva- tration has stated that ". . . Puerto Rico is almost
tion methods if erÜ'siÜ'n were to be presented. This totally laeking in natural resources aronnd which
limited land area means that agricuLtural potential industrial complexes of any rnagnitude or depth could
may be constrained, good industrial sites may be be developed." 2
scarce, and the island is susceptible to problems in-
herent in high population density and the dangers of The Federal Relationship.-While of a different
pollution and environmental degradation involved character frorn such factors as its size, location, and
in concentration of industry in small areas. The faot resource endowment, Puerto Rico's relationship with
that it is an island in the Caribbean, on the other the United States is also a factor which has condi-
1 Under conditions of unemployed resources, the provision of ernR 2The Overall Economic Development Plan lor the Commonwealth
ployrnent to those resources may be considered ane of the objeCtives 01 Puerto Rico, June 1966,
p. 129. Commonwealth of Puerto Rico
of the industrial sector. Economic Development Administration.

tioned, and still conditions, its emire economy in DEVELOPMENT POLICY, STRATEGY,
general and its industrial sector in particular in a AND PROGRAMS
very fundamental way. From lhe beginning of its
political relationship with the United States, it has Conditions When Industrialization
had completely free access to the enormous mainland
U.S. market and to the U.S. financial markets. There -Strategy Was Adopted
are no restrictions on labor or capital fiows. Persons, In the early 1940's when the first organized at-
goods, and funds are able lo move between Puerto tempts to bring about rlhe economic development of
Rico and the maiuland without legal restrictions. Puerto Rico began, the economy was primarily agri-
Conversely, it is subject to unrestricted competition cultural. Sugar, coffee, and tobacco production were
from producers located on the mainland. Its products the main activities. Industrial production was a small
are afforded the same tariff and other trade protection part of total output. Et was dominated by textiles and
as are products produced on the maiuland and they tobacco and sugar processing. Population was high
are subject to impopt eompetition resulting from in relation to land area and resources. Income and
reduced tariffs and other trade concessions in the wage rates were low and unemployment was high.
same way as products produced on the mainland. 3 Federal Govermnent assistance was a significant fac-
With the dollar as its currency, it is not subject to tor. Tables 1 and 2 summarize the more significant
balance of payments and exchange rate prohlems in of those conditions.
the intern3Jlional sense. On the other hand, it does
not have available to it the tools of monetary, ex- Table 1.-Economic Indicators~ 1940
change, and trade policy possessed hy independent
countries. In general, it is covered hy the Federal A. Population, labor force, and employment
1. Population:
legal system. From all these perspectives, its econ- Total ______________________ .________________________ 1,869,255
Density (No. per sq. mile) __________________________________ 544
omy must operate in the same way as that of a State. 2. Labor force:
Total _________________________________________________ 602,000
In addition, as a part of the U.S. Federal system, Percentage labor force participation ________ ~_____ 52.1
Pueno Rico participates in Federal assistance pro- 3. Employment:
Total _________________________________________________ 536,000
grams and is suhject to certain Federal legal and Percentage of total population ________________.. ____ .______ 28.8
regulatory requirements which affect its economy. 4. Unemployment:
Total ______________________________________________ 66,000
That participation and fue application of Federal Percentage of labor force _________ .. _________________ 11.1
B. Producto investment, income,
regulatory requirements are not automatic as in the and consumption
case of a State. Instead, the provisions of particular
Constant 1954 Current
statutes are determining. Its position is thus in sorne prices prices
cases similar to a State and in sorne cases it differs
1. GNP:
in terms o.f the extent of participation and coverage.
Historically the extem of participation has been high
Total __ ~ ________________ ~____ $499,601,000
Per capita __________________ 269
$287,000,000 1
2. Gross fixed domestic investment:
and the movement seems to be in the direction of
achieving State-like treatment. A further significant
factor in this connection is the faot that Puerto Rican
Total __ ., _______ ~_________
Percentage total of GNP ____
National income:
Total ___.,_______________
407,000,000 225,000,000
Per capita __ ~ ______________ ~__ 218 121
citizens and corporations under certain conditions 4. Person~l income _________________________________ _
are not suhject to the Federal income taxes. U.S. 5.
Personal consumption expenditure __________________ _
Personal savings ___________________________ _
Customs duties on items imported to Puerto Rico
and U.S. excise ·taxes on Puerto Rican rum and to- Source: Socio-Economic Statistics 01 Puerto Rico, Puerto Rico Eco-
hacco sold on the mainland are returned to Puerto nomic Planning Board, and Socio-Economic Study 01 Puerto Rico,
May 1977, Commonwealth of Puerto Rico, Office of the Governor.
Rico. Insofar as legal and regulatory requirements
are concerned, those of greatest significance for the
econorny have heen the Fair Labor Standards Act Pa~ticularly significant facts as shown by these
(particularly minimum wage standards), requirements tables and to which atlention is called are: the already
for use of the U.S.-flag carriers (the Jones Act), and high population density; the high level o.f unemploy-
U.S. ,trade and tariff policy. Environmental protec- ment (without the emergency public works program
tion requirements and energy regnlations are cciming it would have been in the arder of 15 percent); the
to he of increasing importance. (For a discussion of low level of GDP and national income on both a
these points see part two, volume 1, of this Study.) total and a per capita basis; a high relative level of
personal consumption with personal consumption
3 There are limited exceptions to the texto The United States has
expenditnre exceeding both personal income and
imposed sugar quatas on Puerto Rico and Puerto Rico is able to national income; the dominance of agricuIture in
impose a tariff on coffee imports as a result of spedal legisIation both ineome and employment and the far-back sec-
authorizing such action. Leibowitz, A. H., The Applicability 01 Federal
Law to Puerto Rico, 56 Geo. L. J., 219 (1967). ond place of manufacturing (25 percent of manu-

Table 2.-1ncome and Employment by Sector, 1940 received from 1941 to 1946 as a result 'Of increased
National income Employment
consumption 'Of rum caused by the wartime shortage
of whisky in Ithe United States.
(Mi11ions Amount The most important factor in the Federal relation-
oí (Thou- ship was, however, the free-trade relationship. The
Sector dollars) Percentage sands) Percentage
evidence seems c1ear that in the 1940's, Puerto Rico
Al1 sectors ____:__________ 225 100.0 536 100.0 was, on balance, benefiting substantially from the
Agriculture __ .~ ______ ._________ 70 31.1 22. 42.7
Manufacturing ._______ 27 12.0 56 IDA relationship. The U.S. Tariff Cornrnission examined
Home needlework ---------------------.------- 45 8.4 the situation in ,some detail and conc1uded that,
Construction _____________ 3 1.3 16 3.0
Transportation and other "Notwithstanding the impossibility 'Of accurately esti-
public services _________ 18 8.1 20 3.7
Commerce __________ 26 11.7 54 10.1
mating the magnitude 'Of the net gain which Puerto
Finance, insurance, and
real estate ____________ 25 10.9
Rico has derived from its free-trade relations with
2 0.4
Services _____________________ 21 9.3 73 13.6 the Unilted States, all evidence indicates that it has
Government ______________ 19 8.5
Rest oí world (net) ________ 16 7.1
13 2.4 been large." 5
Emergency public works ____________________ _ 24 4.5 Table 3 shows the size of Puerto Rico's trade and
the extent of Federal expenditures in 1942 and 1943.
Source: Socio~Economic Study 01 Puerto Rico.
From this it is to be noted that there was a trade defi-
cit each year and that, while ilhe value of exports was
facturing employment was in agricultural products high, it was exceeded by both imports and Federal
processing industries); and the low levels of wages. grants and expenditures.
The unique fiscal and trade relationship arising A number oí special factors had adversely affected
from Puerto Rico's pacticipation in >the U.S. Federal employment and- income. Application of the U.S.
system was a major factor in the economy at the Fair Labor Standards Act to Puerto Rico in 1938
time of the adoption oí a development strategy in significantly increased coSits in some industries, e.g.,
the early 1940's. Federal disbursements were being home needlework. Amendment of tha! Act in 1940
made in Puerto Rico for regular Federal Government provided for a flexible system under which minimum
programs (education, agricuiture, highways, social wages would be established industry by industry in
security, veterans benefits) and spedal programs (hur- aocordance with ability to payo It still operated,
ricane relief, unemployment and work programs, food however, to put an upward pressure on wage costs.
relief, agricultural adjustment and relation programs, By 1940 the Puento Rican sugar industry was faced
public health). Large disbursements were also being with competition from mechanized production on
made for military projects and activities. In addition, the mainland and in duty-free areas such as Hawaü
remittances were being made to Puevto Rico of excise and the Philippines and from Iow--cost production in
taxes collected in the States on rum and tobaoco im- Cuba. Cigar production was suffering from a shift in
ported from Puerto Rico. Finally, loans were being smoking habits from cigars to cigarettes.
made in Puerto Rico by agencies of the Federal
Government. Federal disbursement amounted to
$147 million in 1943. Excise tax remilltances amount- DEVELOPMENT POLICY AND
ed to $157 million in the period 1942~46. Military PROGRAM
expenditures totaled $167 million in the period
1941-43. Total Federal grants and expenditures in The First Organized Development Elfort
Pnerto Rico were $118.2 million in 1942 and $143.7
million in 1943. 4 A "windfall" of $160 million in It was under fuese economic circumstances ilhat
increased remittance of U.S. excise tax on rum was the Popular Democratic Party led by Munoz won
control of the legislature in 1940 after a campaign
4 See The Economy 01 Puerto Rico, report of tbe United States
Tariff Commission, March 1946, pp. 4, 5, and 11. .;; [bid., D. 9.

Table J.-Balance of External Payments of Puerto Rico, FY 1942 and 194J 1

[In thousands of dollars]

1942 1943
ITEM Netcredit (+) Net credit (+)
Receipt" Payments debit (-) Receipts Payrnents debit (-)
Merchandise trade (adj.) ___ ... __ .__ ._____ .__ .... ______ 103,205 154,660 -51,455 88,289 116,698 -28,409
Other items ___ .... _ ... ______ .. __. _ _ _ _ _ _ _ _ 13,380 43,483 -30,103 12,109 30,957 -18,848
Federal grants and expenditure _______.. __ ._____ ._. _ _~ _-'"12,,1'":,63::4~_ __=~'__-....:~~""'__~""_'=::.::..._
3,474 +118,160 147,435 _ _:.3:c:,7~53='--_+~14C'3"',6=82:__
Total _.. _ .. _____ ... __ .___ .. _ _~.... _. _ _ _ _ .__ 238,219 201,617 +36,602 247,833 151,408 +96,425

1 Constructed ÍTom appendix VI-"Balance of external payments of Puerto Rico, FY 1928, 1942, and 1943." [bid., p. 66.

promising "Pan, Tierra y Libertad" and Tugwell was erations by investing in govemment-owned and op-
appointed Govemor in 1941. This represented a erated enterprises. It concentrated on products for
major change in the politicalatmosphere and a shift sale in the local market which could be produced
in emphasis from an almost exclusive concem for from local raw materials such as bagasse, sand, c1ay,
future political status to a concem for improvement limestone, and waste papero Lack of shipping, arising
in the well-being of the people. from the war, and the natUfe of the raw materials
This concem for the welfare of the people led to provided a protection for the local market and war-
certain specific actions designed to improve economic time shortages enhanced local demando Four plants
conditions. A Planning Board was established and in addition to the inherited cement plants were es-
made responsible for preparing the government's tablished, one each for paperboard, shoes, structural
capital budget. Investment was considered to be rthe c1ay products and sanitary ware, and glass con-
prime mover in development. The guiding principIe tainers (based on the high demand for rum). It
was to invest to create "work "paces." The decision invested in the Caribe Hilton Hotel. Construction of
was made to use the $160 million (5 times the bud- a textile mill was begun. It also operated labor train-
get) of extraordinary receipts from the excise rtax on ing and technical research projects and handicraft
mm as Ithe source of investment funds for financilllg projects in textiles, ceramics, and fumiture.
income generating, self-supporting enterprise. The Stimulation of private investment played sorne part
following public corporation, modeled on the TVA, in the early approaches to development of the indus-
were set up to carry out the program: trial sector. PRIDCO was prepared to provide build-
ings for lease to private firms. In 1944 an office was
The Land Authority .............................. 1942
The Transportation Authority .............. 1943 opened in New York to promote private investment
The Communications Authority .......... 1943 in Puerto Rico. A bill providing tax exemption for
The Puerto Rico Industrial prívate industrial investment was passed by the leg-
Development Co. (PRIDCO) .......... 1943 islatUfe in 1944 but was not signed by Govemor
The Development Bank ........................ 1943 Tugwell.
The Housing Authority ........................ 1944
The Agriculture Company .................... 1946 The operation of the other authorities added a
The Water Resources Authority .......... 1946 dimension to the program for industrial development.
The Aquaduct and Sewer Authority .... 1946 Through them the infrastructure necessary for such
development was improved. The Development Bank
Several of these corporations were authorized to provided a means by which capital could be pro-
borrow in the open market to augmenttheir sub- vided before PRIDCO had built up its credit
scribed capital. standing.
lnitially, the focus of policy was onagriculture and
the rural areas. An attempt was made to settle land-
less farmers on their own plots in newly established
The Second Phase oí Industrial Development
rural communities. Sorne sugar plantations were Many factors led to a change in the basic ap-
bought by the Government and an attempt made to proach to the development of the economy in general
operate them on a profit-sharing basis with workers. and the manufacturing section in particular. As pre-
The Agriculture Company undertook local food dis- viously indicated, difficulties with the agriculture
tribution. A rural self-help housing program was 'program arose and by the mid-1940's it was becom-
undertaken. Except for the housing program, these ing apparent that agriculture could not be the fore-
activilties were unsuccessful for a number of reasons, most sector for sustaining the economy and achieving
among ihem-too many farmers and too little land, full employment. Problems were being encountered
high costs, insufficient water, etc. These activities in the early approach to industrial development.
have played tittle role in subsequent development Most of the government-owned plants were ineffi-
programs. cient and operating at a loss. The number of jobs
While the maln emphasis was on agriculture, the created was disappointingly small (about 2,000 by
importance of industry in Puerto Rico's development 1947). The extraordinary excise tax receipts had
was recognized. The Puerto Rican Industrial Devel- been fully utilized and collections had fallen back to
opment Cornpany was formed with an initial capital more normal levels. It had become c1ear that the
of $500,000 which had been increased to $19 million investment necessary to accomplish a reasonable
by 1946. It also received a cement plant valued at $2 level of employment would far exceed amounts which
million and plans for a number of projects which had could be provided by the Govemment.
been under consideration by the Puerto Rican Re- Under these circumstances a new approach
construction Administration, a Federal, depression- evolved under which (1) emphasis was placed upon
spawned, institution then in liquidation. industry rather than agriculture as the lead develop-
The Industrial Development Company began op- ment sector, (2) reliance on prívate investment and

ownership replaced reliance on govefIlment owner- creased labor costs resul!ing from rising wage rates.
ship and financing, and (3) production for export In this latter connection, labor intensive industries
rather than production for the local market was in Puerto Rico were subject to both uncertainty and
stressed. In essence it was decided to exploit the potentiaUy rising labor costs.
advantages of being an integral part of the U.S. In addition it appeared that, wrnle a number of
market, freedom from the Federal income tax, and industries were investing and ,expanding in Puerto .• ,
an abundant supply of low-wage labor. Rico, they had no relation to each other or to other
Perhaps the most significant action in implement- industries on the island.
ing such a policy was lhe passage in 1947 and an No specific new policy or approach was articulated
amendment in 1948 of a law providing: exemptions at first but as a resul! of such circumstances an
for specified periods from the Puerto Rican business approach began to evolve under wrnch promotional
income tax of earnings from investmen t in new in- efforts rather than being neutral as to type of indus-
dustry and exemption of new business from property try, became more focused on types of industry
taxes. This and the exemption from U.S. Federal thought to be les s subject to cyc1ical changes, less
income taxes together were expected to provide a vulnerable to increasing wage costs, and capable of
powerful incentive for investment in Puerto Rico by providing linkages which would resul! in a more
mainland corporations. Various other incentives integrated sector strncture. Efforts carne to be di-
were also provided (see chapter VIII). Steps were rected toward larger, well-known mainland com-
taken to seU PRIDCO-owned plants to private indus- panies. Larger and more technical projects were
try and disposition was completed by 1951. An ac- pushed and there was a move toward more capital-
tive program for promotion of private investment in intensive industries. Efforts to stimulate local indus-
Puerto Rico was instituted. The Economic Develop- tries were increased with the period of taxation-
ment Administration was established and given func- exemption for such industry being extended to 17
tions of research, investment promotion, and tech- years.
nical assistance to industry. The Planning Board be- The policy of stimulating more competitive, higher
gan to undertake a substantive planning role. wage, greater technological industries in Puerto Rico
PRIDCO had powers to build, lease, and sell indus- which started in the early 1960's was formalized in
trial buildings and to invest in or lend to private lhe Overall Economic Development Plan 6 of June
enterprises. It also, in 1953, began a program de- 1966:
signed to induce location of industry outside San
... The essential task of economic development
Juan involving lhe use of special incentives, includ-
is to shift the preponderance of employment from
ing cash grants. A program for promotion of local snch low productive, low paying activities [agri-
industries began in 1954. A Division oí Puerto Rican culture, home needlework, tobacco stemming] to
Industry was established in Fomento which provided those which can pay the worker higher wages be-
assistance in the conduct of feasibility studies, tech- cause productivity is greater (p. 94). .
nical and management advice, and marketing assist-
ance. Local plants were made eligible for startup ... Unlike other countries, which are primari1y
involved in producing for their own economies
subsidies not available to others and particioated in and which possess tools such as tariffs and foreign
the PRIDCO loan and grant programo The Develop- exchange controls to protect their industries,
ment Bank also made sorne foans to local enterprise. Puerto Rico must add to and retain its market
through constant improvement of its productivity
Third Phase oí Development vis-a-vis the highly efficient U.S. manufacturers
without the aid of artificial barriers that independ-
Certain major elements of the approach to de- ent countries may use. Since most of the indus-
velopment adopted in lhe late 1940's and mid-1950's tries coming to Puerto Rico tend to be relatively
have continued to the present time: Emphasis on labor intensive, as compared with the United
production for export; dependence on the private States, constantly improving productivity per labor
sector; concentration on industry as the lead sector dollar becomes vital to continued growth. Be-
I in the economy; and use of incentives, especially ex- cause nonmarket pressures are forcing wages up
emption from corporate income taxes, for stimulat- very rapidly as compared to the mainland, it is
ing investment in industry. necessary to improve labor productivity in Puerto
Rico at arate which will be faster thari on lhe
Developments during the 1950's, however, led to mainland. This can be done by increasing tbe
reappraisal of sorne aspects of the approach. While capital investment per worker, which unfortunate-
considerable success had been attained in attracting ly tends to be associated with reduced job oppor-
industry to Puerto Rico, it was proving to be par- tunities .... (pp. 97-99).
ticularly vulnerable to cyc1ical variations in business
6 The Overall Economic Development Plan For the CommonweaIth
conditions in mainland United States and to in- 01 Puerto Rico, Economic Development Administration, June 1966.

... Because of lhe lack of land and the poten- economic development in Puerto Rico, the Planning
tial population growth and the need to raise in- Board stated:
comes, it was necessary to restructure the Puerto
Rican economy by developing a manufacturing ... Labor intensive industries would continue
sector which could compete with mainland fac- to provide a significant proportion of new manu-
tories in their own markets. In order to be com- facturing employment. Because 75 percent of un-
petitive, it was necessary to utilize technology employment in Pnerto Rico stems from male
which was sufficiently labor-saving, in order that workers, the capital-intensive heavy industries such
the Puerto Rican manufacturers could compete in as chemicals, petrochemicals, metals, shipping,
lhe United States market, even though, from the aircraft, etc., would be given increasing promo-
standpoint of the total economy, it might be de- tional emphasis. Other industries being investi-
sirable to adopt a less advanced technology in gated are plywood and wood products, educational
order to increase employment (pp. 130-131). films, and the processing and canning of fish.
Projects for the production of paper from bagasse
Similar statements are contained in later docu- are under stndy. The capital-intensive industries,
ments issued by the Planning Board. For example, as stated in OEDP, will integrate Puerto Rico's
it was stated that: industrial base by attracting labor-intensive satel-
lite manufacturing operations. The base industries
. . . The promotional policy of the EDA was will provide raw materials and semiprocessed
modified to apply increasing effort to attract heavy products to be used as inputs for the outputs of
industries, such as petroleum refining and deriva- satellites manufacturing operation. 8
tive chemicals. These are bigger users of male
labor, relative to female, and pay higher wage By 1965 programs were being carried out in ac-
rates because of their greater use of capital per cordance with a development plan in which priori-
employee. However, in relation to the amount of ties, goals, and programs were laid out, first in gen-
capital invested and to promotional time and effort eral and lhen in quite specific terms. A Planning
expended, their total direct impact npon employ- Board Paper of December 1967, Goals, Priorities
ment is less. At the same time, these heavy indus- and Prograrns for the Cornrnonwealth of Puerto Rico
tries do not use uneducated and unskilled labor. and the Southwest Region, discusses priorities in
But this is precisely the kind of labor that con- general terms and indicates that (1) "as a matter of
stitutes the hard core unewployed. And when per- priority" the Government will continue to support
sons of this type do secure employment, they are the industrial sector, (2) agriculture is "an important
heads or members of the families whose incomes sector from the point of view of income andemploy-
are below the poverty lineo Nevertheless, in order
to provide more employment for males, accelerate ment," (3) expansion of exports and making the
overall income growth, broaden as well as deepen economy more self-sufficient "should be tried" in
the technological and industrial foundations of the order to improve the balance of trade, and (4) a
island's economy, and provide greater stability, "special emphasis" will be given to the expansion of
increasing emphasis on the promotion of heavy vocational, secondary, and university education and
industry is unavoidable. 7 "The Commonwealth Government intends to assign
a very high priority to the are as of vocational
Again it stated education."
... The persistently high rate of unemployment Tourism is mentioned and it is stated that other
and the less-than-desirable rate of uninduced for- sectors "should expand somewhat in line with the
mation of industrial enterprises mean that the expansion of the sectors of manufacturing, agricul-
EDA will have to accelerate its great efforts in ture and tourism." The Four Year Economic and
promoting both mainland-owned and domestically- Social Development Plan for 1969-72 says that
owned enterprises. The need for these expanded first priority is to be given to expansion oí voca-
efforts will be made aH the more urgent as the tional, technical, university, professional, and sec-
agricultural development programs to raise pro- ondary ,education; second priority to the industriali-
ductivity in that sector result in unavoidable addi- zation program "which already has become a back-
tional releases of manpower of low productivity. bone of our development progress"; third, to the
And, yet, for reasons pointed out in a preceding
section, promotional emphasis will have to be on expansion of the highway program; and fourth, to
heavy, capital-intensive, high-productivity indus- the expansion of water supply to meet the needs of
tries, rather than on labor-intensive ones, as in the the San Juan area, the expansion of the petrochemi-
past (pp. 75-76). cal industry, its needs of agriculture, and the pop-
ulation expansiono AH other programs are assigned
In discussing the goals and overall strategy of a fifth priority.
7 The Four Year Economic and Social Development Plan 01 Puerto 8 Overol! Program and Project Priorities for the Development 01
Rico, 1969-72, Office ai fue Governor-Puerto Rico Planning Board, Puerto Rico and the Southwest Regian, Puerto Rico Planning Board,
December 1968, II. 71. August 1970, !l. 1-5.

GO'vernO'r Luis MunO'z Marin in his 1964 message Table 4.-Projected Labor Force, Employment, and
tO' the legislature and GO'vernO'r RobertO' Sanchez Unemployment, 1970 and 1973
VileIla in his 1969 message articulated specific gO'als [In thousands]
tO' be accO'mplished which were incO'rpO'rated intO'
1965-70 1 1%5-73 2
the O'verall develO'pment plan. They were:
1965 1970 1965 1969 1973
1. Full educatiO'n in quality and depth. Labor force __.______________ 772 898
2. Maximum health, with substantial equality for Total employment ........ _" ____ .... 688 813 657 772 806·
Agriculture - - - - - - 122 104 119 84 70
all as regards the quality of the science applied fO'r Manufacturing ----~------------
128 163 121 145 170
its formation. Mining -~-------
2 1 2
Construction ------------------------- 66 83 62 73 84
3. Ahorne fO'r every Puerto Rican family. Transportation ----------- 30 34 28 30 34
4. An increased share for PuertO' Ricans in the Public service (utilities) _____ 16 19 16 19 26
Trade ---------------- 124 157 119 132 143
grO'wing PuertO' Rican ecO'nO'my and in decision- Services ------------,,--------------- 112 140 97 116 132
Finance and real estate _ . 10 13 17
making in the prlvate sectO'r. Goveroment ------------------- 87 113 83 109 128
5. AbolitiO'n of extreme pO'verty. (A mO're specific Unemployment ----------------- 84 85
gO'al of a minimum armual income O'f $2,000 per 1 See Overall Economic Development Plan, table 75.
family is indicated elsewhere in fue document.) 9 2 See Overall Program and Pro;ect Priorities.

ProjectiO'ns were made O'f the number of jO'bs re-

76 and the interirn periO'd of 1969-72 was estab-
quired tO' "brlng emplO'yment tO' acceptable levels"
lished. 12 Table 5 shO'ws prO'jectiO'ns of increases in
(apparently a 4-percent unemployment rate) and O'f
GDP by sectO'r, expected for the time periods 1964-
the arnount of employrnent to be provided by fue
individual sectors. Table 4 shows such projections. 65,1969-70, and 1969-73.
Output per wO'rker was estimated as increasing
The document, Goals, Priorities and Programs
from $6,000 in 1969 to $8,142 in 1973. Output per
For The Commonwealth oi Puerto Rico and the
wO'rker in rnanufacturing was projected to increase
Southwest Region, shO'ws tO'tal emplO'yment as in-
by 50 percent frO'm $7,400' to $11,154 during.the
creasing frO'm 690,000 in 1965 tO' 960,000 in 1975.
It was estimated that a total of 170,200 additional sarne period. 1 "
jobs wO'uld be required in the 1965-70 perlO'd of
which 52,800 wO'uld be prO'vided in 1965 and Policies of the New Administration
117,200 in the perlO'd 1966-70. 10 An increase of The new administratiO'n in Puerto Rico which
¡ 108,000 new jO'bs was prO'jected fO'r the perlO'd carne into oflice J anuary of 1977 has nO't yet fuIly
1969-1972." articulated its ecO'nomic policies and prO'grams.
It was anticipated that accomplishrnent of these HO'wever, it appears that there wiIl be sorne changes
O'bjectives would have certain specific results and in frorn thO'se fO'llO'wed by previous administratiO'ns.
the later years prO'jectiO'ns were rnade of variO'us First it seerns that greater emphasis will be given
changes expected to O'ceur. A target of an 8.8 percent tO' assisting the developrnent O'f other sectors, espe-
annual rate O'f increase in GDP for the perlod 1965- cially agrlculture and services than has been fue
9 See, The OveraIl Economic Development Plan For the Common~
case in the past. RecognitiO'n was given tO' such a
wealth 01 Puerto Rico, op. cit., p. 144.
100verall Program and Project Priorities, table 42, p. 86. 12 Four Year Economic Development Plan 1969-72, table 3, p. 24.
I I Four Year Economic Development Plan, 1969-72, Summary, p. 9. 13 See Goals, Priorities and Programs, pp. 1-4_

Table 5.-Projected Increase in GDP, by Sector

[In millions of dollarsJ

196G-72 1 1964-65 1969-70 2 1969 1973 3

1960 1966 1969 1972 1964-65 1969-70 1969 1973

Sector total _______ ,, __________________________ 1,697 3,147 4,314 5,383 2,914 4,420 4,326 6,563
Agriculture --------------------------------------------- 164 172 235 270 182 252 160 281
Manufacturing ----------------------------- 366 761 1,130 1,630 623 1,066 1,099 1,874
Construction and mining _____________________________ 101 240 350 480 211 371 319 534
Commerce and commercial services -----""-- 337 671 832 1,065 583 826 841 1,172
Utilization and transportation -------------------- 152 283 362 483 249 338 398 543
Finance and real estate _____________________ ~ 172 290 460 670 318 507 509 763
Other services ____________ ,, _______________________ 161 396 465 600 341 473 509 688
Government and miscellaneous exports ________ 187 361 480 640 507 587 503 729
Errors and omissions ________________ 57 27 -10

1 See Goals, Priorities and Programs, For the Commonwealth 01 Puerto Rico and the Southwest Region, Dec., 1967, p. 10, and Four-Year Eco-
nomic Development Plan 1965-72, p. 13.
2 OveraIl Economic Development Plan, p. 172.
3 Overall Program and Pro;ect Priorities, p. 172.

policy by Governor Carlos Romero Barcelo in bis remain a major feature of development policy, com-
February 1978 State of the Commonwealth Message plete exemption will not be made available for new
in wbich he stated: investment; (2) for the first time some exemption
will be extended outside the rnanufacturing sector to
. . . It is evident that our economic develop-
ment cannot depend on any one isolated or par- certain areas of the services sector; and (3) sorne
ticular sector to achieve the growth that Puerto provision is made for rnndest credits for expanded
Rico needs in order to solve its most pressing payrolls.
problems. For this reason we feeI that it is im- While emphasis is to be given to Ü'thersectors as
portant that no one sector be neglected nor left indicated, it appears that the basic policy toward
behind through want of effort or imagination. manufacturing is to be continued. The Governor
strnted in his message ,that:
In that message he set forth a detailed program
for agricultural development wbich has been started. . . . The development of the manufacturing
He also indicated that a study of the services sector sector is and wilI continue to be the stanchion of
is being made and mentions a few specific projects our growth, although it wilI not continue to be the
wbich are being explored. The examples given in- only sector getting Govemment priority.
volve new services related primari1y to Puerto Rico's
location in relation to the United States, Europe, Apparently the policy of emphasizing high wage,
and Latin America. eapital-intensive industry wilI be continued as indi-
A proposal for modification of the tax incentives cated by the Govemor's rnessage which says:
program has been passed by the legislature. In bis . . . We intend to tum Puerto Rico into a
message the Govemor said: center of attraetion for the pharmaceutical indus-
. . . The funda¡p.ental objective of our Govern- try, and for the electronics and the seientific and
ment is to have our growth move from a genera- hospital instruments and equipment industries.
tion based on tax incentives to a stage of seIf- These industrial sectors, which have industries
generation and greater economic stability and with great growth potential in the United States
soundness, and to a stage where it (the manufac- and in the entire world, wilI also, in the next
turing sector begins to contribute in measurable decade, be important stanchions in Puerto Rico's
form to the maintenance of our economic infra- industrial growth by nature of the faet that they
structure and governmental services. are high-salary industries that require highly de-
veloped skilIs; that require a fair amount of labor;
Salient featuresm the legislrntion are: (1) wbile sig- and that have great potential for exporting to
nificant tax exemption is to be provided and is to Caribbean and Latin American markets.

Chapter III.-Growth and Change in the
Manufacturing Sector
This chapter examines in sorne detail the growth OVERALL SECTOR GROWTH
and change which have occurred in the manufactur-
ing sector in Puerto Rico. The contribution of the Output
sector to output, income, and employment is ap-
i praised. A comparative analysis is made of the con- We have used contributiO'n tO' GDP as the best
~~ tributions oí various industry groups. Changes in available measure O'f output.
¡ costs and other factors affecting the performance of By 1977 manufacturing had become first among
the sector are identified. The effects of changes in the sectors in its cO'ntribution to GDP. Its rate of
J the nature and structure 'Oí the sector in terms oí increase in cO'ntributiO'n was, however, exceeded by

I their implications for the role O'f the seétor and O'f
particular industry groups in contributing to easing
O'f PuertO' RicO"s econO'mic problems and fO'r PuertO'
that O'f the constructiO'n, services, gove=ent, and
finance-insurance, and real ,estate sectors.
Table 1 shO'ws the manufacturing sectO'r cO'n-

Rican pO'licy tO'ward the sector are appraised. The
analysis is based on overall data relative to O'utput,
incO'me, emplO'yment, and the like and on detailed
examinatiO'n O'f particular industry groups which is
contained in the "Industry Profiles" in Part Three.
tributiO'n to GDP, the size O'f its cO'ntributiO'n in
relatiO'n tO' the tO'tal, and the rate of increase in its
As may be seen from this table, the sector's con-
tribution to GDP increased from $105.7 million in

Table 1.-ManufaC-turing Sector Contribution to GDP and Labor Income

Item 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962
(millioDS of current dollan) _ 128.0 100.8 105.7 119.7 143.1 158.2 183.9 203.5 220.9 255.4 277.5 284.0 326.9 366.3 424.4 488.5
Percentage of total _...._._. ___ 22.4 16.4 15.1 16.5 18.6 18.0 19.9 20.2 20.8 22.3 22.5 21.2 21.9 21.7 23.0 23.3

I (millions
of 1954 dollars) ___ 147.5 113.4
increase __________ ~ ___ -23.1
189.6 203.5
14.2 7.3
252.6 268.1
14.7 6.1
361.8 401.7
12.5 11.0
Labor income:
(millions oí current doIlars) _ 56.7 55.9 57.9 61.6 67.4 74.7 86.3 100.3 107.5 124.2 137.0 146.3 159.1 18004 206.3 241.9
Percentage GNP ____________ 9.3 8.6 8.1 8.2 8.3 7.7 8.2 9.1 9.4 10.4 10.6 10.7 10.5 9.6 11.3 11.8
(millions oí constant dollars) 63.4 60.6 65.1 72.0 75.9 78.5 91.7 100.3 107.6 122.8 132.5 135.1 147.2 162.8 182.4 210.9
Percentage increase _______ -4.4 7.4 10.6 5.4 3.4 16.8 9.4 7.3 14.1 7.9 2.0 9.0 10.6 12.0 11.6
Item 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977
(millions of current doIlars) _ 558.6 611.5 668.6 746.3 828.0' 938.4 1,064.2 1,190.0 1,334.6 1,598.1 1,879.2 2,199.2 2,309.8 2,882.1 3,347.3
! Percentage oí total ~_____ 22.7 23.8 26.0 23.7 23.3 23.8 24.0 23.6 23.5 25.2 27.1 28.3 28.1 32.5 34.4

I Amount
oí 1954 doIlars) ___ 448.0 471.1 503.8 549.6 582.3 629.8
increase _______ ~ 11.5 5.2 6.9 9.1 5.9 8.2
897.3 1,034.2 1,130.1 1,108.3 1,341.1 1,520.1
14.8 15.3 9.3 -1.9 11.8 13.3
Labor income;
(millions oí current dollars) __ 277.4 303.4 337.6 371.1 417.0 477.7 553.8 607.9 658.6 751.3 841.8 925.8 964.8 1,028.1 1,162.2
Percentage GNP _ _ _ _ _ _ 12.2 12.2 12.2 12.3 12.5 13.0 13.4 13.0 12.5 13.1 13.4 13.6 13.5 13.8 14.7
(mi1lions of constant dOllars) 239.8 258.2 283.0 305.2 326.3 365.9 408.1 429.9 447.6 494.2 534.8 528.4 482.9 478.9 523.3
Percentage increase _________ 13.7 7.7 9.6 7.8 6.9 12.1 11.5 5.3 4.1 10.4 8.2 -1.2 -8.6 -.8 9.3

Source: Puerto Rico Planning Board, unpublished Income and Production Information.

1949 to $3,347.3 million in 1977. In real tenns it they were earlier. Its contribution to income relative
was $1,520.1 million in 1977 as compared with to the contribution of the rest of the economy, as
$120.4 miIIion in 1949, an increase of 1,163 percent. measured by manufacturing labor income as a per-
Its share of GDP rose from 15 percent in 1949 to centage of GNP has been remarkably stable. This is
over 34 percent in 1977. Its output in 1977 was an apparent gradual upward trend which slowed
almost twice that of the trade sector which made the sligbtly after 1963, with the percentage increasing
next largest contribution to GDP. Except for the from 7.4 in 1949 to 11.5 in 1963, to 13.5 in 1975,
period 1964-71 during which ít was relatively stable, and then rising more rapidly to 14.7 in 1977.
the rate of increase in output has, however, fluctu- Labor income has increased more rapidly than has
ated widely and frequently. No upward trend in the GNP produced by the rest of the economy, but man-
rate of increase is discernible. In contrast, manufac- ufacturing sector income as a percentage of GNP,
turing output as a percentage of total output rose while increasing steadily, has increased very slowly.
graduaIly from 15.4 percent in 1949 to 22.5 percent In 1977, it was 14.7 percent of GNP as compared
in 1957, was 23.5 percent in 1971, and then began with 8.1 percent in 1949. This amounts to an aver-
to rise very rapidly thereafter, reaching 34.4 percent age increase of onIy .23 p~rcentage points ayear.
in 1977. FinaIly, -the sector's contribution to income has
On a comparative basis, the sector's output faIls been considerably less than proportionate to output
into about five periods, or phases, as shown by growth. Manufacturing sector contribution to labor
table 1. From 1949 through 1956, it increased more income increased by 704 percent from 1949 to 1977,
rapidly than did the output of the rest of the econ- while its contribution to GDP increased by 1,163
omy. The period 1958-63 was one in which manu- percent. The very large excess of GDP over gross
facturing output increased at about the same rate product (GNP) discussed in chapter 1, coupled with
as that of the rest of the economy. After increasing the fact that in 1977 manufacturing sector's contri-
at a faster rate in 1964 and 1965, it again increased bution was over 34 percent of GDP while its contri-
at almost the same rate as that of the rest of the bution to labor income was less than 15 percent m
economy from 1966 through 1971. From 1972 GNP, suggests that the sector's contribution to Puerto
through 1974 it increased much more rapidly than Rican income is less than that suggested by GDP and
that of the rest of the economy, reflecting the large net income figures for the sector. The failure of the
increase inthe pharmaceuticals and sorne of the sector' s contribution to Puerto Rican income to keep
machinery indus(ries, and the faIl in output of other pace with seotor output has been particularly marked
sectors, particularIy construction. Then, in 1976 and from 1969 to the present. The rate of increase in
1977, it increased at arate greatly in excess of the labor income produced by the manufacturing sector
rate for the rest of the economy, reflecting a rapid was higher than the rate of increases in GDP pro-
recovery in sector output and the continued de- duced by the sector in 14 of the 21 years from 1949
pression of the construction sector. through 1969. That rate was, however, lower than
The combination of these kinds of changes in the the rarre of iacrease in manufacturing output in every
economic conditions and the changes which have year from 1970 through 1977. This is a reflection of
been occurring in the nature of Puerto Rican in- the increasing capital intensity of Puerto Rican in-
dustry, make it very difficult to reach concIusions dustry.
based on recent perfonnance as to the future course From all this, it may be concIuded that the manu-
of total sector output. The best infonned guess, how- facturing sector is not producing as much income for
ever, would seem to be that, given a relatively Puerto Rico as migbt be expected of it in ligbt of its
high level of mainland economic activity, the course perfonnance in tenns of output. This is, of course,
of Puerto Rican manufacturing wiII be upward. to a considerable degree, a result of the fact that
Puerto Rico is heavily dependent on outside sources
Labor Income of capital, given the extremely low rate of domestic
The data in table 1 show that the amount of the The tax exemption program has also been an im-
sector's contribution to income is large and has in- portant factor in the inability of the sector to produce
creased greatIy, amounting to $72 miIIion in 1954 as much income for Puerto Rico as might be expected
doIlars in 1950 and over $523 miIIion in 1977, an in view of the volume of investment and output which
increase of 627 percent. had been forthcoming. While sorne exemption has
As was the case with its contribution to output, probably been a necessary element in inducing ex-
the rate of increase in the sector's contribution to ,ternal investment in Puerto Rico, aud may have
income has varied widely from year to year. It become increasingiy significant in recent years, the
appears, however, that the annual rates of increase fact lhat the higb volume of returns lo property flows
have tended to be somewhat lower after 1963 than largely lo nonresidents and produces little or no tax

Table 2.-Manufacturing Sector Employment, Except Home Need/ework and Percentage
Change in Employment (Fiscal Years)

Itero 1949 1950 1958 1960 1962 1963 1964 1965 1966 1967
___________________ (thousands)_ 49 55 70 81 92 91 54 106 115 121
Percentage of total ___________ (percentage) ---- 9.6 14.9 15.7 15.0 16.1 17.5 18.1 18.8
Absolute change _________ (percentage) --- 6.0 15 11 11 -1.0 3.0 12.0 9.0 6.0
Rate Di change ____________ (percentage)_ 10 ..0 27.4 15.7 13.6 -1.1 3.3 12.8 8.5 5.2

Itero 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977
________________ Cthousands) _ 127 135 132 132 141 142 147 137 133 144
Percentage of total ___________ (percentage) ___ 19.4 20.0 19.2 18.9 19.1 18.8 19.0 18.6 18.5 19.5
Absolute change _______ (percentage) ____ 6.0 8.0· -3.0 9.0 1.0 5.0 -10.0 -4.0 11.0
Rate of change ___________ . (percentage)_ 5.0 6.3 -2.2 6.8 0.7 3.5 -6.8 -2.9 8.3

Source: Puerto Rico Planning Board, 1977 Economic Report to the GovernoT; Puerto Rican Department of Labor, Census of Manufacturing.

revenues for Puerto Rico means that the seotor does thraugh 1969. After 1969 the employment growth
not produce the Puerto Rican revenue in the volume rate dec1ined sharply and was negative or zero in 4
that would be expected otherwise. of the 8 years fram 1970 through 1977. There was,
In spite of these facts, it is true that -lhe manu- however, substantial recovery in 1977. After 1969,
facturing sector's contribution to income in Puerto the sector's rate oí emp!oyment growth c10sely fol-
Rico has been atlJd now is substantial, amounting to lowed the rate oí growth in total employment. (See
about 15 percent of GNP in 1977. chart 1.)
While the increase in manuíacturing employment
Employrnent has been large, it has fallen considerably short of
expectations. A comparison of actnal with varions
The manufaaturing sector has made a significant prajections of total sector employment is contained
direct contribution to increased employment. The in tab!e 3.
extent of that contribution is shown by table 2. As This tab!e shows that employment in 1977 was at
may be seen, manufacturing employment increased about the level projected for 1969, and that em-
by about 92,000 or 167 percent, fram 1950 to its p!oyment in the sector at its peak in 1974 was on!y
peak in 1974. Although seotor employment declined very slightly aboye projected 1969 levels. Employ-
slightly from 1974 to 1977, it was still 19.5 percent ment in 1977 was 25,000 less than a projected 1972
of total employment and 25.2 percent of total non- leve! and in 1970 was 31,000 less than a projection
governmental employment in 1977. The manufac- for that year. As pointed out earlier, in 1977 em-
turing employment level inl977 was 1,000 less than p!oyment in manufacturing was exceeded by that in
that of ,¡he trade sector and 24,000 less than that of government and in commerce.
the government sector. It exceeded the services sec- It was estimated that 40,000 new jobs in manu-
tor by 17,000. Employment in manufacturing grew facturing; 9,000 in 1966-78, 9,000 in 1967-68,
somewhat more rapidly until 1969, with the most 10,000 in 1968-69, and 12,000 in 1969-70; would
rapid growth occurring in the period from 1965 be created by PRIDCO investment in the period

ThQusands Thousands
160 160
140 140

120 _.--_._-- 120


80 _._._._._._.-.~'
------ ------- -'- 100

__-:._=::._:::.::_~_::::._:::.:_:-::._:.::_-::.=_::._-::.:::_:-:-._=.::c:. Labor InlenSlve Induslry
---- /-

W Capilal Inlensive Induslry _________________ /

" W
20 \ -----------
____________ ------ W
- - '-- --'-- -- O

Table J.-Actual and Projected Employment in Manufacturing
[In tbousands]

Item 1960 1965 1967 1968 1969 1970 1972 1973 1974 1976 1977

Actual ------------ 81 106 127 127 135 132 141 142 147 133 144
Projected-Four-Year Economic Development Plan (table 21) _ 81 125 131 139 169
Projected-OveralI Economic De-velopment Plan (table 75) _ 128 163
Projected-OveralI Pro!?ram and Project Priorities _________ 121 145 170

1966-70. In fact, the increase was only 17,000 for 1960-65 and 1965-70. The rate was 3,750 ayear
the period, that is, 12,000 for 1966-67, none from for tite perlod 1970-74 when (1974) total employ-
1967-68, 8,000 from 1968-69, and a decrease of ment in tite sector reached its peak; and 1,714 for
3,000 from 1969-70. the perlod 1970-77. An annual inere'ase of 5,000
A 1975 Pnerto Rican report made in connection represents only Y37th of reported unemployment
wilh U.S. trade negotiations stated that Puerto Rico (186,000) in 1977. Even with a sharply declining
had an objective of adding 345,000 jobs to lhe 1974 rate of participation of population in the labor force
level by 1985. 1 An objective of increasing manufac- (a 21-percent decline from 1950 to 1977), thetotal
turing employment to 232,000 was also stated. This labor force increased by almost 19,000 ayear from
would mean an increase of 89,000 over the period, 1960 to 1965; 17,000 ayear from 1965 to 1970;
an average annual increase of 8,000 jobs in manu- and about 22,800 a year from 1970 to 1977.
facturing. These rates exceed by a considerable mar-
gin any rates of increase which have been achieved
in lhe past on a sustained basis. INTERNAL SECTOR CHANGES
Perhaps more significant is lhe fact lhat the
growth in manufacturing employment has been At tite same tinte tltat the manufacturing sector
small in relation to absolute increases in population was growing as indicated aboye and as changes
and lhe labor force and to the volume of unemploy- were occurring in intersectoral relationships as dis-
men!. Population increased by 921,000 and the cussed in chapter 1, changes were also taking place
labor force, even accepting tite sharply declining within the sector. There were changes in composi-
participation rates used in its .ca1culation, increased tion, structure, factor costs, relative importance of
by 241,000 from 1950 to 1977. industry groups, and other circumstances. In this
As seen in table 2, employment in manufacturing section we will identify tite most significant changes
increased at arate of 5,000 per year for the periods and 'examine tltem in order to provide a basis for
appraisal of tlteir relation to Puerto Rican develop-
1 Commonwea1th of Puerto Rico Presentation Befare the Intemational
Trade Commission and Special Trade Representative, May 1975, pp.
ment problems and of their significance for govern-
269, 275. mental policy toward tite Isector.
Table 4.-Number of Industrial Establishments by Indus.try Groups for Selected Years 1966-76

Percent- Em- Em- tions fOI
age ployees ployees tax ex-
changes per unit per unit emptions
Industry group 1966 1970 1973 1976 1966-76 1966 1976 1977-78
Apparel _______ ~________________________________ 412
Food _____________ ~_____________________ 475 454 465 400 -3 81 93 10
447 422 364 -23 42 66 6
Fabricated metals ___________ 212 304 361 289 36 17 16 4
Chemicals ______ ____________ ~____ 91
Fumiture ____________ ~.. ____________________ 217
111 145 176 93 34 71 22
222 161 157 -28 18 18 2
Stone-clay-glass ____________ ~__________________ 236 237 149
Wood _______________________________ 80 251 -16 25 27 O
81 190 131 64 6 8 O
Electrical machinery ___________________________________ 89
Printing _________________ __________ 119 113 122 131 47 90 102 18
122 124 119 O 19 24 O
Miscellaneolls manufacturing _______________ 102 132 112 89 -13 37 34 4
Instruments ___________________________________ 26
36 57 79 204 107 134 7
Machinery exceIlt electrical _____________________ 53 60 56 67 26 37 68 7
Rubber and plastics _________ ~_______________________ 36 58 57 67 86 75 52 3
Textiles _________________________________ 62
Leather ______________________._________ 74 SO 81 53 -15 100 81 1
75 55 40 -46 128 125 1
Paper 30 26 37 40 33 39 37 3
Tobacco 73 49 47 35 -52 108 130 . O
Primary metal 20 17 21 23 15 43 43 O
Petroleum ________________________ 10 20 100 186 147
16 18 O
Transportation _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _. _ _ 21 21 20 14 -33 31 24 2
All industries ___________________________ 2,417 2,641 2,782 2,497 3 62 65 90
Source: Puerto Rico, Department of Labor, Census oj Manujacturing Industries (various 'years),

Relative Importance of Industry Gronps sector are shown by re1ative ehanges in output that
oceurred during the period 1947 through 1965.
Number of Eslablishments.-A very rough indi- Sugar deelined sharp1y both in abso1ute a~ount ~nd
cation of the relative size of industry groups an~ a as a percentage of sector output. By 1965, ¡t eontnb-
basic introduction to the stru~ture of manufactu~mg uted on1y 5.7 percent of sector output as compared
. Puerto Rico may be obtamed by a companson with 30.5 percent in 1947. The appare1 industry on
m . th .
f the number of establishments m e vanous the other hand grew at the same rate as the who1e
~dustry groups. Tab1e 4 Iists the number of estab- sector until about 1960, and in 1965 produced 13.4,
rshments and change in number of estabhshments percent of sector output as compared with 15 per-
f~r se1ected years from 1966 to 1976. The industry cent in 1947. Other industries also began to assume
groups are ranked according to number of firms m increasing importance during the period, with indus-
1976. .h tries other than sugar, a1coholic beverages, appare1,
It is clear that in tenns of number of estabhs - and tobacco making up 63.3 percent of sector out-
ments, the sector is dominated by the ~pparel, food put in 1965. Among those were foad products;
products, and fabricated meta1s mdustnes. . . textiles; stone, clay, and glass; beer; leather prod-
Trends in growth in number ~d. changes :n s~e ucts; paper and paper products; and printing and
of establishments may a1so be slgmficant. Nme. m- publishing.
dustry groups had a 10ss in number of estabhsh- The period from 1965 to 1970, especially that
ments from 1966 to 1976. Of these, five also re- from 1965-67, saw the beginning of majar changes
dueed their average number of emp10yees: Trans- in the eomposition of the manufacturing sect<;r. It
portation, 1eather, textiles, ~rniture, and. misee1- was during this period that the phannaceutieals,
1aneous industries. The remamder of the mdustry petrochemicals, metals and machinery, and petro-
groups which 10st abso1ute number of establi~h­
leum refinery and products industries began to
ments gained in average number o.f eu;p10yees, .m- achieve importance in tenns oí contribution to sec-
dieating that industrial eoneentratlOn IS oceurnng tor output. By 1967, combined they produced 28.8
in these industries.
percent of the sector's contribution to GDP. By
During the 1973-76 reeession period, on1y se~en 1970 the largest industries in tenns of percentage of
industry groups inereased in number of estabhsh- sector output were apparel (14.8 percent), food
ments. Positive ehange oecurred in the following
products (11.9 pereent), a1coholie beverages (10.7
industries as indicated: Instruments (+39 percent); percent), electrica1 maehinery (8.4 pereent), and
maehinery except e1ectrica1 (+20 percent); chemi- pharmaeeutieals (8.0 pereent).
ca1s (+21 pereent); rubber and p1astics (+18 per-
cent); petro1eum (+ 11 percent); primary meta1s After 1970 the ehemicals and maehinery indus-
(+10 percent); and e1ectrica1 machinery (+7 per- tries grew rapidly in tenns of output. The output of
cent). . the phannaeeutica1s industry inereased in real tenns
A samp1e of 90 applications for industn~l. tax by 77 pereent in one year from 1971 to 1972 a~d
exemptions was taken from some Fomento Iistmgs continued to increase rapid1y. There were a1so rapld
for December 1977 through March 1978 in order increases in the output of the petrochemica1s and
to get a fee1 for the eharaeter of eurrent industrial e1ectrica1 machinery industries. Appare1 output a1so
growth (by finn). Aeeording to the samp1~, the increased in real terms unti11975, but not as rapid1y
chemiea1 e1ectrica1 machinery, and appare1 mdus- as the fastest growing components. By 1977, the
tries aee~unt for 56 pereent of the establishment 1argest contributors to sector GDP were phanna-
requests for new tax exemptions. ceutica1s (26.5 percent), deetrica1 machinery (12.9
pereent), appare1 (8.3 pereent), and petroehemiea1s
Ontput.-Re1ative ehanges in oulput by industry (7.4 pereent).
groups, as measured by ehanges in eontribu~ion to
GDP, will give an indication of ehanges m the Employment.-Emp10yment is probab1y one of
composition of struetnre of the sector. Sueh ehanges the most important direct indieators of an industry's
are shown in tab1e 5. significance to Puerto Rico. It is significant of eourse
It is apparent that in tenns of output, the seet<;r because of its social and política1 implícations.
in 1947 was dominated by the food, a1coholie However, given the very heavy dependence of Puerto
beverages, appare1, and to a mueh 1esser extent, Rico on externa1 investment, its importanee in
tobaeeo industries, whieh together aecounted for income generation gives it a more than usual eeo-
85.6 pereent of sector eontribution to GDP. The nomic significance.
sugar, appare1, and a1coholic beverages (primari1y The re1ative importance of industry gronps over
rum) industries made up 68.9 pereent of the total the past 30 years as indicated by their provision of
output of the sector. emp10yment is shown in tab1e 6.
A number of changes in the composition of the As may be seen from tab1e 6, industry group

Table 5.-Industry GrúUp Output (Cantribution tr> GDP)OutPUt ofSector GDP
[In millions oí current dollars]

1947 1955 1960 1965

Percent· Percent- Percent- Percent-

ageof age of ageof age oí
Amount total Amount total Amount total Amount total

Food (except alcoholic beverages) _ $52.5 41.0 $61.5 27.8 $82.6 22.5 $135.7 20.3
Sugar __________ . (39.1) (30.5) (33.5) U5.2) (34.6) (9.4) (38.3) (5.7)
Soft drinks ______ .. ___________________ _
(l.4) (1.1) (2.4) (1.1) (4.5) (1.2) (8.2) (1.2)
Beer ______________________ (3.2) (2.5) U3.4) (6.1) (20.0) (5.5) (30.2) (4.5)
Other foad products ______ . (S.8) (6.9) (12.2) (5.5) (23.2) (6.3) (59.0) (8.8)
Apparel _ _ _ _ _ _ _ _ _ _ _ _ _ ._ _ 19.2 15.0 33.1 13.0 51.6 14.1 89.7 13.4
Tobacco ____________ 8.0 6.2 12.0 5.4 12.0 3.3 39.0 5.8
Stone, clay, glass __________________ 3.8 3.0 13.0 5.9 23.3 6.4 36.4- 5.4
Printing and publishing 1 _ _ .. _ _ _ _ _ _ _ __ 3.0 2.3 4.6 2.1 11.2 3.1 14.4 2.2
Wood and furniture _________________ _ 3.5 2.7 8.0 3.6 9.3 2,5 16.3 2.4
Textiles - - _. ._ - - - - .8 .6 7.4 3.3 14.7 4.0 22.8 3.4
Paper 5.2 1.4 ~O 1.0
Leather 7.4 2.0 25.9 3.9
AIcoholic beverages _______ _ 30.0 23.4 33.1 15.0 43.8 12.0 78.9 11.8
Subtotal ____ ~ _________ ~ __________ ._':12::0:::.8'______9,,4:::.4:....._ __'1:._7:_::2.:::7_ __'7.:8.::1_ _-----'2::6::1=.1-----'__7:.:1.::.3'---_ _:..:4,,66::.1=----_----=69:..:.:.8_
Other information ___________________ ~_------'7..::.2=----_------'5:::.6'_____ _------'4:_::8..::2_ _--=2::1::.8_ _ _1::0::5=.2'---_ _'2:.:':::.7'----_ _-=2::20:..:.5=---_---=32:::.,,1_
Total 218.0 220_9 366.3 686.6

1967 1970 1971 1972 1973

Percent- Percent- Percent- Percent- Percent-

ageof ageof age of ageof age of
Amount total Amount total Amount total Amount total Amount total

Foqd __________________________ _ 133.9 16_2 141.9 11.9 145_1 10_8 158.8 9_9 182_3 9_7
Sugar _____ _____________ _
(35.3) (4.3) U7.8) (1.5) U9.0) (1.4) (7.4) (05) 03.0) (0.7)
Beer ____________________ (29.0) (35) (33.2) (2.8) (25.9) (1.9) (35.1) (2.2) (34.0) U.8)
Other food products __________ _ (69.6) (8.4) (90.9) (7.6) (100.2) (75) (115.3) (7.2) (353) (7.2)
Apparel __________________ _ 115.6 14_0 175.7 14.8 168.0 12.6 187_9 11.8 202.4 10.8
Tobacco ----_._---
Stone, clay, glass _______________
Wood and Iurniture _____________ . 18.6 2.2 27.2 2.3 39.4 3.0 39.4 2.5 31.0 1.6
Textiles ___________________ 26.7 3.2 41.9 3.5 54_2 4.1 44.3 2.8 55.2 2.9
Printing-and publishing ________ 14.2 1.7 22.6 1.9 25.2 1.9 25.5 1.6 29_7 1.6
Paper _____ 9.1 1.1 12.6 1.1 13.2 1.0 11.8 0_7 11.7 0.6
Leather ____________________ 31.3 3.8 38.0 3.2 36.7 2.7 30.1 1.9 32.4 1.7
Subtotal _____________________.__4:.;00=.2-----'----'48::.:.3_ _----'5:..:4:.5.::3__4.::5:..:.:.8_ _---=5::95:..:.2=---_44:..:.::.6'---_ _.::62=-7e,.1=--------'3,,9::.2'----_-----'6:.:8::1::.1_--=-36:::.=-2_
Rubber and plastics ___________ _
Primary metals ___________________________ _
Fabricated metals ______ _ 21.4 2.6 36.4 3.1 45.8 3.4 56.1 3.5 58.3 3.1
Transportation equipment __________ 2.4 0.3 2.6 0.2 2.7 0.2 3.7 0.2 4.8 0.3
Other chemicals __________________ 4.7 0.6 7.4 0_6 7.8 0.6 9.3 0.6 13.0 0.7
Instruments ~ 11 ~ D ~ 3. Q.l 3.8 U8 U
Total ___________________________...:5:..:1,,0.::1_-=-61::.;:,8_ _-----'7-=2::2.=2__6:..0::.7'-----_ _.:79::6::.0'---------'5.:8::.9_ _ _-=-83::8::.7-----'---"5=2.::.5_ _----'9:.:1.:.9.:.:0_---'-48::.9'---
Alcoholic beverages __________________ 93.7 11.3 127.4 10.7 141.6 10.6 159.5 10.0 164.2 8.7
Soft drinks _ __________________ 14.5 1.8 26.9 2.3 29.4 2.2 36.0 2.3 37.4 2.0
Pharmaceuticals __________________ 49.9 6.0 94.9 8.0 126.7 9.5 225.4 14.1 315.5 16.8
Petrochemicals __________________ 23.0 2.8 18.7 1.6 21.2 1.6 59.0 3.7 64.5 3.4
Petrorefining ______________________ 23.9 2.9 45.7 3.8 56.6 4.2 40.1 2.5 83.8 4.5
Other petroproducts _______________ 18.3 2.2 23.9 2.0 28.2 2.1 34.6 2.2 42.3 2.3
Machinery ___________________ 11.2 1,4 13.9 1.2 15.5 1.2 27.6 1.7 38.3 2.0
Electrical machinery ___________ 58.4 7.1 100.4 8.4 107.8 8.1 154.9 9.7 188.9 10.1
Subtotal ____________________:.:2::.92:::..:.9_...:3:.:5.:..4'-----_ _:..:4:..51:.:.:.8_...:3:.:8:::.0'---_ _5::2::7.:;.0'---.....:3:..9.::.5_ _ _7:.:3.::7:.:.1-----'----'46::..:.1_ _.....:9.:.34.:;.:..9__4::9.:..7,---
803.0 97.2 1,174.0 98.7 1,323.0 99.1 1,575.8 98.6 1,853.9 98.7
Discrepancy ______________ 25.0 3.0 16.0 1.4 11.0 .8 22.3 1.4 25.3 1.3
Grand total ___ ._ _ __ 828.0 1,190.0 1,334.6 1,598.1 1,879.2

Tabl" 5.-Industry Group Output (Contribution to GDP) Output oi Sector GDP-Con.
[In millions of current dollars]

1974 1975 1976 1977

Percent- Percent- Percent- Percent-
ageof ageof ageof ageof
Amount total Amount total Arnount total Amount total

Food --------------------------------. 105.9 9.4 230.7 10.0 258.2 9.0 246.9 7.4
Sugar --___ ____ ____ ______ .
~ ~ ~
(23.8) (1.1) (35.8) (1.5) (27.3) (0.9) (5.6) (0.2)
Beer _____________ ~~~ ____ ~

(23.7) (1.1) (32.8) n.4) (36.3) (1.3) (29.0) (0.9)

Other foad products ---~~ ____ ~ (158.4) (7.2) (162.1) (7.5) (194.6) (6.8) (212.3) (6.3)
Apparel _. ____________ ~ _____________ 233.3 10.6 270.0 11.7 255.9 8.9 276.6 8.3
TobaccO ----------------------- 116.0 5.3 115.9 5.0 123.6 4.3 127.0 3.8
Stone, clay, glass - ____ ._ _ ._. 89.9 4.1 91.0 3.9 79.3 2.6 86.7 2.6
Wood and furniture - - - - - - - - - - - - - _ 30.1 1.4 25.6 1.1 29.8 1.0 29.2 0.9
Textiles -------_._-~ .. _ - - 59.4 2.7 53.2 2.3 42.3 1.5 45.4 1.4
Printing and publishing _____ ~ ________ ._ 35.7 1.6 :137.5 1.6 40.3 1.4 37.0 1.1
Subtotal ----------------------- 770.3 35.0 823.9 35.6 829.4 28.8 848.8 25.4
Paper _~._._.

Leather - . -.. __ __

Rubber and plastics ______ .. _ _ _ ~ __

__ ~ ____ .. ~ 16.5
Primar)' metals --_.~~.. ______ 24.0 1.1 22.5 1.0 16.2 0.6 13.4 0.4
Fabricated metal.s _ _ _ _ ._ _ _ _ _ _ _ 70.7 3.2 73.3 3.2 73.9 2.6 74.6 2.2
Transportation equipment -._._----- 5.2 0.2 5.1 0.2 5.9 0.2 5.8 0.2
Other chemicals _____________ 8.7 0.4 9.5 0.4 16.2 0.6 29.9 0.9
Instruments -~ .. _._~----- 82.9,._ 3.8 97.6 4.2
Total -_._._-..._ - - - - - - 1,046.7 47.6 1,115.8 48.3 1,036.6 36.0 1,073.4 32.1
Alcoholic beverages 156.7 7.1 172.6 7.5 205.8 7.1 204.1 6.1
Soft drinks _ _ _ _ _ _ ._ _ _ _ _ _ _ 35.2 1.6 40.5 1.8 43.8 1.6 58.2 1.7
Pharmaceuticals --_._--. .. __ _-_._
.... 378.4 17.2 506.6 21.9 666.0 23.1 886.2 26.5
Petrochemicals - - - - - - - - - - _ . _ - 109.4 5.0 103.8 4.5 251.1 8.7 247.4 7.4
Petrorefining 102.7 4.7 69.5 3.0 72.5 2.5 62.2 1.9
Other .petroproducts __ ._~ _ _ _ _ _ .. _ 77.6 3.5 22.2 1.0 33.4 1.2 43.3 1.3
Machinery -~""._---"-'-_._--_ .....- 50.0 2.3 59.2 2.6 83.0 2.9 131.5 3.9
Electrical machinery _ _ _ _ _ ._ _ _ _ . 231.5 10.5 242.0 10.5 297.4 10.3 430.2 12.9
Instruments - _... _..__.. 4.9
Total -_ __ .. .. _--------_ ..... _- 1,141.5 51.9 1,216.4 52.7
2,228.4 66.6
Subtotal -_.._. __ ._~ .... ~-- ..... _- 2,188.2 99.5 22,332.2 101.0 2,834.0 98.3 3,301.8 98.7
Discrepancy __ .. _____ ..._. _ _._._.___ 11.0 0.5 (') 48.1 1.7 45.5 1.4
Grand total __ .________ ._ _ 2,199.2 22,309.8 2,882.1 3.347.3

1 N et income rather than GDP. 2 Industry group totals do not add Ito sector total.
Note: Figures in parentheses add to tota1.
Source: Puerto rucan Planning Board Unpublished worksheet for income and product accounts.

contribution to employment has exhibited two con- but 20 or more employed more ilian 1,000 persons.
trasting tendencies---change and continuity of relative The second major element of change was the
importance. Change is exemplified, first by an in- dramatic decline in importance of the sugar industry
crease in lhe number of industries with a significant and tbe rise in importance provided by tbe e1ectrical
number of employees. In 1949, 'almost 60 percent machinery, professional and scientific instrnments,
of manufacturing employment was provided by tbe and pharmaceuticals industry. Sugar milIs, which
sugar milI, apparel, and food industries. A fourth employed over 14,000 people in 1949 (25.8 percent
was provided by sugar milIs alone. These three in- of seotor employment), employed only 3,400 in 1976
dustries, plus tabacco; stone, c1ay, and glass; and (2.4 percent of the sector total). In contrast, em-
wood and fumiture provided OVer 80 percent of ployment in the e1ectrical machinery industry rose
manufacturing emplayment. Only 10 industries em- from 1,450 in 1954 to 13,600 in 1977; instrnments
ployed as many as 1,000 people. By 1967, 80 per- from 1,050 to 12,000; and pharmaceuticals from
cent of sector employment was spread over 10 437 to some 9,360. These three industries, whose
industries and 19 industry groups had more than employment was too smalI to be separate1y reported
1,000 employees. In 1977, 10 industry groups still in 1949, provided 6.4 percent of sector employment
provided 80 percent of manufaoturing employment in 1958; 10.6 percent in 1967; 12.8 percent in 1970;

Table 6.-Manufacturing Employment by Industry Group, Selected Years 1949-77
1949 1958 1967

Percent- Pereent- Percent-

ageof ageof age of
Industry Amount total Industry Amount total Industry Amount total

Sugar _ _ _ _ _ _ _ _ 14,241 25.8 Apparel _____________ 19,998 25.3 Apparel ___________ 35,755 28.5
Apparel _____ ....:.__________ 10,805 19.6 Sugar ___________ . 7,676 10.1 Food ______________ --;--_ 10,468 8.4
Tobacco ~ _ _ _ _. _ 7,116 12.9 Pood _____ 6,144 8.6 Leatber ____________ 10,406 8.5
Food 5,808 10.5 Tobacco _______ 4,509 6.3 Electrical machinery __ 8,549 6.9
Stone, clay, glass _ _ _ 2,562 4.6 Textiles ________ 4,444 6.2 Tobacco _______ 7,070 5.6
Wood and furniture ____ 2,215 4.0 Stone, clay, glass ________ 4,131 5.8 Textiles __ ~_____ 6,809 5.4
Alcoholic beverages _~_ 1,512 2.7 Wood and furniture _____ _ 3,327 4.7 Stone, clay, glass ___ _ 6,418 5.1
Printing and publishing __ 1,459 2.6 Electrical machinery ____ _ 3,049 4.3 W ood and furniture _ _ 4,512 3.6
Textiles _________ _ 1,450 2.6 Leather products ________ _ 2,620 3.7 Sugar _____ _ _ _.
3,954 3.2
Other chemica1s ______ _ 1.268 2.3 Fabricated metals ________ _ 2,007 2.8 Fabricated metals _ _ _ o 3,678- 2.9
Leather products ~ ____ _ 911 1.7 Printing and publishing_ 1,516 2.1 Instruments __ ~ ____ _ 3,284 2.6
Soft ddnks _~ ___ _ 883 1.6 Alcoholic beverages _ _ 1,196 1.7 Rubber and plastics ~_ 3,233 2.6
Beer 799 1.4 Instruments __________ _ 1,148- 1.6 Printing and publishing __ _ 2,398 1.9
Machinery ________ _ 617 1.1 Beer __________ _ 1,119 1.6 Petroleum _____ ~ __ 2,027 1.6
Fabricated metals ________ _ 310 0.6 Other chemicals _____ _ 1,119 1.6 Soft drinks _~ ____ _ 1,803 1.4
Paper and products _____ _ 294 0.5 Rubber and plastics ___ _ 1,022 1.4 Beer ____________ _ 1,774 1.4
Soft drinks _______ . 947 1.3 Alcoholic beverages __ __ 1,393 1.1
Machinery ~ _ __ 703 1.0 Pharmaceuticals _____ _ 1,384 1.1
Paper and products _ _ o
635 0.9 Paper and products ____ _ 1,245 1.0
Primary metals ____ _ 426 0.6 Machinery _______ ~_ 1,155 0.9
Phannaceuticals _______ _ 364 0.5 Petroleum chemicals 1,155 0.9
Primary metaIs 866 0.7
Other chemicals _ _ ~ 790 0.6
Transportation equipmenL 670 0.5
Miscellaneous ________ 2,389 4.-3 Miscellaneous ___________ 4,587 6.4 Miscellaneous ______ ~ 3,651 2.9
Total _______ 55,137 Total _________ 71,188 Total ~ _______ 125,287

1970 1972 1973

Percent- Percent- Percent-

age of age of age of
Industry Amount total Industry Amount total Industry Amount total

Apparel ________ _ 36,819 25.9 Apparel ________________ _ 39,200 26.6 Apparel _____________ 40,721 26.6
Food ______________ 11,717 8.6 Food ______________ _ 16,608 12_3 Food _______________ 14,954 9.8
Electrical machinery __ 10,701 7.8 Electrical machinery ____ _ 12,290 8.3 Electrical machinery _____ 14,817 9.7
Textiles _________ _ 8,904 6.5 Instruments 7,726 5.2 Instruments _________ 9,069 5.9
Leatber ___________ _ 8,309 6.1 Textiles 7,693 5.2 Textiles ___________ 7,594 5.0
Stone, clay, glass ______ _ 6,839 5.0 Stone, clay, glass _ _ _ -7,459 5.1 Stone, clay, glass _________ 7,239 4.7
Tobacco _ _ _ _ __ 6,120 4.5 Leather _____ ~ ____ _ 6,100 4.1 Leather __________ 6,655 4.4
Instruments _ _ _ _ ._ 5,246 3.8 Fabricated metaIs ___ _ 5,835 4.0 Tobacco _______ 5,569 3.6
W ood and furniture _ _ 5,089 3.7 Tobacco _______ ~_ 5,557 3.8 Fabricated metals ______ 5,470 3.6
Fabricated metaIs _______ _ 4,952 3.4 Wood and furniture _ _ 5,049 3.4 PharmaceuticaIs _______ 4,965 3.2
Rubber and plastics __ _ 4,057 3.0 Rubber and plastics _ _ 3,813 2.6 W ood and furniture ____ 4,895 3.2
Sugar _______ ._ _ 3,699 2.5 PharmaceuticaIs ______ _ 3,535 2.4 Petrochemicals ______ 4,856 3.2
Petroleum __________ _ 2,907 2.1 Petroleum __________ _ 3,174 2.2 Sugar ____________ 3,751 2.5
Printing and publishing_ 2,559 1.9 PetrochemicaIs ______ _ 2,939 2.0 Rubber and plastics _____ 3,744 2.4
Beer _________ _ 1,985 1.5 Other chemicaIs _____ 2,910 2.0 Printing and publishing___ 2,097 1.9
Petrochemicals ________ _ 1,745 1.3 Printing and publishing_ 2,559 1.9 Petroleum _________ 2,764 1.8
Pharmaceuticals ___ _ 1,686 1.2 S1).gar __________ _ 2,051 1.4 Soft drinks _________ 1,714 1.1
Soft drinks ________ _ 1,681 1.2 Soft drinks _ _ _ ._ _ 1,736 1.2 Paper and products ____ 1,362 0.9
Alcoholic beverages ___ _ 1,498 1.1 Alcoholic beverages ______ _ 1,660 1.2 Machinery ____ -'-___ 1,291 0.8
Other chemicals ____ _ 1,459 1.1 Beer ____________ :_ 1,475 1.1 Other chemicals _____ 1,221 0.8
Paper and products ___ _ 1,392 1.0 Machinery _ _ _ _ _ 1,438 1.0 Primary metals ______ 1,204 0.8
Machinery _________ _ 1,392 1.0 J'aper and products _ _ 1,199 0.8 Alcoholic beverages ___ ,_...,.- 1,147 0.8
Primary metals _________ _ 1,114 0.8 Primary metals _____ _ 1,089 0.7 Beer _ _ ._______ 1,146 0.8
Transportation equiprnenL 545 0.4 Transportation equipmenL 433 0.3 Transportation equipmenL 592 0.4
MisceIlaneous _ _.____ 4,309 9.2 Miscellaneous _______ 3,425 2.3 MisceIlaneous __________ . 3,230 2.1
Total _ _ _ _ 136,737 Total __ ._____ 147,247 Total 152,867

Table 6.-Manufacturing Employment by Industry Group, Selected Years 1949-77-Con.
1975 1976 1977

Percent- Percent- Percent-

ageof age of age of
Industry Amount total Industry Amount total Industry Amount total
Apparel ________________ 36,075 26.4 Apparel _~ ____ ~___ 37,054 25.6 Appare! __________ ~ 36,200 25.1
Food _________ ~ __.__ 15,198 11.1 Food _________________ 16,281 11.2 Electrical machinery ~ 13,600 9.4
Instruments _______________ 10,829 7.9 Electrical machinery _______ 13,337 9.2 Food ____ ~ ________ ~ 113,250 9.2
Electrical machinery _~ 9,919 7.3 Instruments ________ 10,611 7.3 Instruments ___________ 12,000 8.3
Stnne, clay, glass ______ 6,169 4.5 Pharmaceuticals _______ 7,315 5.1 Phannaceuticals _____ 19,360 6.5
Pharrnaceuticals ____ ~_.. 5,964 4.4 Stone, clay, glass _______ 5,333 3.7 Leather ____________ 5,500 3.8
Leather ___________ 5,161 3.8 Leather ~___________ 4,990 3.4 Stone, clay, glass _______ 5,200 3.6
TobaceD _______________ 4,980 3.6 Fabricated metals __________ 4,724 3.3 Machinery ___________ ~_ 14,840 3.4
Textiles .___________________ 4,898 3.6 Tobacco _____________ ~__ 4,531 3.1 Textiles _____ ~____ 4,600 3.2
Fabricated metals ______ 4,610 3.4 Machinery _______________ 4,325 3.0 Petrochemicals _ _ ~ 14,368 3.0
Wood and furniture ______ 3,891 2.8 Textiles __________ ~ 4,277 3.0 Fabricated metals ____ :1.3,800 2.6
Sugar _________________ 3,459 2.5 Wood and furniture _____ 3,737 2.6 Petroleum ___________ 13,720 2.6
Petrochemicals .________ "_____ 3,134 2.3 Rubber and plastics ___________ 3,499 2.4 Wood and furniture _______ 3,700 2.6
Machinery ___________________ 3,055 2.2 Sugar __________ ~ __ ~__ 3,416 2.4 Tobacco ____________ ~ 3,000 2.1
Rubber and plastics ________ 2,744 2.0 Petrochemicals _________ 3,290 2.3 Sugar ~____ 2,737 1.9
Petroleum _____________ 2,620 1.9 Petroleum _______ ~_ 2,938 2.0 Printing and publishing ____ :1. 2,640 1.8
Printing and publishing__ 2,570 1.9 Printing and publishing.__ 2,885 2.0 Soft drlnks __________ 2,282 1.6
Soft drinks _________ ._____ . 1,626 1.2 Other chemicals ______________ 1,915 1.3 Rubber and plastics ____ :1.2,280 1.6
Other chemicals ____________ 1,517 1.1 Soft drinks ____________ 1,727 1.2 AIcoholic beverages ________ 11,999 1.4
Alcoholic beverages _______ 1,467 1.1 Alcoholic beverages ___ 1,510 1.0 Other chemicals __ ~___ 11,872 1.3
Paper and products __ ~_ 1,242 0.9 Paper and products ____ 1,479 1.0 Paper and products _____ 11,760 1.2
Beer ___________________ 1,200 0.9 Beer ___________________ 1,237 0.9 Beer ____________________ 11,632 1.1
Primary metals ~ ____ ~~ 987 0.7 Prllnary metals _______ ~~ 994 0.7 Prllnary metals _________ ll,200 0.8
Transportation equipmenL 414 0.3 Tr&nsportation equipment.. 335 0.2 Transportation equipmenL l160 0.1
Miscellaneous _____ ~ ___ ~___ 2,888 2.1 Miscellaneous ________ ~__ 3,049 2.1 Miscellaneous _____________ 2,600 1.8
Total _________ ~_~ 136,617 Total ___________ 144,789 Total __________ 144,300

1 Estimated by apportioning larger group by labor income contribution.

1949-58 figures are fiscal year averages_
1967-77 figures are October employment which tends to be higher than the fiscal year figures.
Source: Puerto Rico Department of Labor, Census of Manufacturing.

18.8 percent in 1973; and 24.2 percent in 1977. Food products, other than sugar, which had pro-
The rate of growth in employment in pharmaceuticals vided some 13 percent of sector employrnent in 1949,
was especially high aJiter 1970. still provided sorne 12 percent in 1977. In that year,
'In contrast to these changes in the relative volume food produots and apparel provided almost 40 per-
of employment provided by the various industry cent of total manufacturing emp¡oyrnent.
groups, there has been a remarkable consistency and In 1949, the five largest industry employers were
continuity in industry groups which have been the sugar mills; apparel; food products; tobacco; and
major contributors to employment since the begin- stone, c1ay, and glass. In 1958, the list was the same
ning of the Puerto' Rican economic development except that textiles had replaced stone, clay, and
programo glass. The 1967 lis! inc1uded again apparel, food
First, apparel has consistently been the most im- products, and tobacco, but with leather produots and
portant industry in terms of employment. In 1949, electrical machinery replacing sugar and textiles. In
it provided 19.6 percent of manufaoturing employ- 1970, textiles replaced tobacco. In 1976 and 1977,
ment, second only to sugar. By 1958, it had sur- the list included apparel, food products, electrical
passed sugar and provided 25.3 percent of employ- machinery, instruments, and phannaceuticals. If the
ment in the sector. It provided 28.5 percent of sector seven largest industries are chosen, the list remains
employrnent in 1967 and employed 40,700 in 1973. the same from 1963 through 1977, except that in-
In 1977, it employed 36,200, still 25 percent of struments replace tobacco in 1970 and phannaceu-
manufacturing employrnenrt as compared with 19,670 ticals replace textiles in 1975. Three that were on
in 1949, even though many groups were becoming the 1949 list of seven are on the 1977 list and make
more significant as indicated aboye. The employrnent up about 40 percent of sector employment.
provided in 1977 was 2.7 times that of electrical Table 7 ranks the indusay groups according to
machinery, 3 times that of instruments, and almost employment growth (percentage change) 1967-77.
4 times that of phannaceuticals notwithstanding the As table 7 indicates, the top three industries,
rapid growth in employment in those industries after chemicals, machinery except electrical, and instru-
1967. ments, domi.nate the sector in terms of percentage

Table 7.-Net Employment Growth 1967-76
Employrnent Net change Net change Net change Percent change
SIC industry group base 1967 1967-70 1967-73 1967-76 1967-76
Chemicals - -_____ .. _. __________ _____ . _ _
3,329 1,561 7,713 9,191 276.1
Machinery excel)t electrical ___ . _____ . _ _ _ _ __ 1,155 237 136 3,170 274.5
Instruments ____ ,. _____ ._.. _ . ___ .__________ ... 3,284 1,962 5,785 7,327 223.1
Wood products ___ .... __________ .______________ _ 784 814 577 73.5
Electrical machinery __ ,. ___________._.. _. ________ ._ 8,549 2,167 6,268 4,788 56.0
Petroleum products ___ .___ ,_..,___ _ 2,027 880 737 911 44.9
Fabricated metals _________ .. _______ ..,.-____ ._____ ._ 3,678 1,274 1,792 1,046 28.4
Food ______________________________ ._ _ ._ __
19,992 588 2,720 4,179 20.9
Printing ______________ __ 2,397 161 500 488 2004
Paper ______________________ _ 1,245 147 117 234 18.8
Prirnary metals _________________ 866 248 338 128 14.8
Rubber and plastics ____________ . 3,233 824 511 266 8.2
Apparel _________ .__________________ .. _ _ 35,755 1,064 4,966 1,299 3.6
Miscellaneous manufacturing __________._. _ __ 3,651 658 -421 -602 -16.5
Stone, clay, glass _____________________________ 6,418 420 821 -1,085 -16.9
Tobacco __________________________________ _ 7,070 -950 -1,501 -2,539 -35.9
Fumiture ______________ .. _ _ _ _ _ _ _ _ _ _ _ _ 3,728 573 -431 -1,352 -36.3
Textiles ________________________ . 6,809 2,095 785 -2,532 -37.2
Transport ________________ _ 670 -125 -78 -335 -50.0
Leatber __________________ ._____ ._ _ ._ 10,646 -2,337 -3,991 -5,656 -53.1
AH industries _______________________________ ._ _ _ _ _ 125,287 11,450 27,580 19,502 15.6
vVomen's and infants' undergarments ________ .. _______ _ 18,538 1,083 1,415 -2,507 -13.5
Phannaceuticals _______ _ 1,384 302 3.581 5.931 428.5

Source: Unpublished data, Puerto Rico Planning Board, December, 1977_

growth. In tenns of net employment contribution, (driven by the phannaceutical firms with 428.5 per-
however, chemicals, instruments, electrical machin- cent growth), insrtruments, e1ectrical machinery, and
ery, and food, lead the sector, each group adding food. Togelther these four groups had a net increase
over 4,000 new employees during the 1967-76 in employment of 26,000 workers greater than the
periodo net gain for the industrial sector as a whole.
Seven industry groups lost employment during the The recession of 1974-75 impacted on the sector
last decade with the leather and leather products employment, but the largest single source of unem-
industry accruing a net loss of 5,656, over 50 percent ployment carne from the construction sector. Table
of its 1967 work force. 8 reflects the employment impact of the 1974-75
A11 five lead industries 2 by total employment recession periodo
gained net employment during the 1967 to 1977 The machinery except electrical industries in-
periodo However, growth was most rapid in chemicals creased net employment about 3,000 between 1973-
2 Chemicals, instruments, electric machlnery, food, and nonelectrical
76, identifying this group as an emerging growth
machinery. industry requiring more detailed analyses. In general

Table 8.-Net Employment Growth 1973-76

Employment base Net change Net change Net change Percent change
1973 1973-74 1973-75 1973-76 1973-76

Machinery except electric ___________________ _ 1,291 2,056 1,764 3,034 235_0

Instruments __________________________________ _ 9,069 465 1,760 1,542 17.0
Chemicals ____________ .____________ .__________ _ 11,042 152 -427 1,478 13.4
Paper ________________________________________ _ 1,362 -197 -120 117 8.5
Food _______________________________ _ 22,712 1,009 238 1,459 6.4
Petroleum ____________________________________ _ 2,764 58 -144 174 6.3
Printing __ .____________________________________________ _ 2,897 133 -327 -12 -.4
Miscel1aneous manufacturing ____________________ _ 3,230 -632 -342 -181 -5_6
Rubber and plastic ___________________________________ _ 3,744 -103 -1,000 -245 -6.5
Apparel ________________________________________ _ 40,721 -2,694 -4,646 -3,667 -9_0
Electrical machinery ____________________________ _ 14,817 -2,269 -4,898 -1,480 -10.0
Fabricated metals ___________________________________ _ 5,470 148 -860 -746 -13_6
Wood products _____________________________ _ 1,598 -187 -302 -237 -14.8
Primary metaIs _____________________________ _ 1,204 -159 -217 -210 -17_4
Tobacco __________________________________ _ 5,569 -263 -589 -1,038 -18_6
Leather _____________ .________________ .. _ 6,655 -507 -1,494 -1,665 -25.0
Stone-clay-glass ________________________ _ 7,239 53 -1,070 -1,906 -26.3
Furniture __________________________ _ 3,297 -525 -792 -921 -27_9
Transportation ______ ... ____________________ _ 592 -139 -178 -257 -43.4
Textiles _______________________________ _ 7,594 -429 -2,696 -3,317 -43.7
AH industries ______________________ _ 152,867 -3,310 -16,250 -8,078 -5.3
Pharmaceuticals ______________ .__________ _ 4,965 484 999 2,350 47_3
Women's and infants' undergarments ___ ~_ 19,953 -3,060 -3,041 -3,922 -19.7

Source: Unpublished data, Puerto Rico Planning Board, December, 1977_

sector growth is pushed by an increase of 2,931 in idly. By 1977, sorne 53 percent of income generated
one subgroup, "general industrial machinery and by the sector was produced by six industries; i.e.,
equiprnent; service industry machines." The number apparel, electrical machinery, food products, phar-
of firms in this group almost doubled from 11 to 21 maceuticals, instruments, and stone-c1ay-glass.
during the 1973-76 periodo While both the absolute The performance of a few particnlar industries is
and relative changes in this group appear striking, especially noteworthy. First, insofar as the volume
the statistics should be considered in Iight of the fact of income generated is concemed, the apparel indus- .
that this group represented only 3 percent of total try is clearly in a class by itself. While its percentage
industrial employment in 1976. of total sector income has fallen, primarily as a result
Instruments, chemicals, and food also had rela- of the beginning of new industries, the volume of
tively large net increases, while the paper industry income which it has produced has consistently ex-
increased only modestly. It is interesting to note the ceeded that produced by any other industry by a .
influence on the chemical industry of pharmaceuti- wide margin (except for 1947 in which a slight1y
cals. The chemical industry had a net increase of larger amount was produced by the sugar mill
872 workers less than the net increase in pharma- industry). Even in 1977, it still produced Yeth of
ceuticals, indicating a net loss of other products sector labor income. Its contribution Was 147 per·
w1thin the chemical group. cent of that of electrical machinery and 191 percent
The tobacco, leather, stone-c1ay-glass, furniture, of that of pharmaceuticals. The performance of the
transportation, and textile industries aH sustained food products industry is also noteworthy. Its con-
losses during the 1973-76 periodo These industries tribution to Puerto Rican income was a higher
may incur a long-term negative impact resulting from percentage of the sector total in 1977 than in 1947,
1973-74 economic recessionary periodo The other 11 percent as compared with 9.9 percent. It and
industries, despite losses, appeared to begin to apparel together contributed 27 percent of the sector
recover in 1975-76. total.
Puerto Rican Income.-Contributions to Puerto The growth in income produced by fue electrical
Rican income is probably the best measure of an machinery and pharmaceutical industries has been
industry's contribution to Puerto Rico. As previously striking. Information it not available on the contribu-
indicated, we have used labor income produced as tion of these industries prior to 1967. However, in
fue best available measure of that contribution. lit that year, labor income produced by the electrical
wonld have been possible to also include taxes paid. machinery industry was 6.8 percent of the sector total
However, given the tax exemptions which exist in and that of pharmaceuticals was 1.2 percent, only
Puerto Rico, income from taxes is significant only larger than that of other chemicals and transportation
in the cases of alcoholic beverages, tobacco, and, for equipment. By 1977, electrical machinery's contribu-
1975-77, petrochemica1s. tion had become second only to fuat of appare1, and
It is apparent from table 9 that, insofar as that of pharmaceuticals had come to rank fourth,
generation of income to Puerto Rico is concemed, with the two industries producing 11.1 percent and
only a very few manufacturing industries were im- 8.6 percent, respective1y, of the sector's contribution.
portant in 1947. In that year, two industries, sugar
milis and apparel, generated half the income pro- Comparison of Contribntion to Onlput, Employ-
duced by the sector. Four produced over 70 percent ment, and Income.-Examination disc10ses fuat
of the total and sugar mills, apparel, tobacco, food there have been considerable divergencies within in-
products, a1coholic beverages, and printing and dustry groups in their contribution to income, em-
publishing over 80 percent. Sorne diversification had ployment, and output. A comparison of such con-
occurred by 1960. However, eVen then, apparel, tributions among indu.tries is made in table 10.
sugar milis, and food products still produced 40 per- Diflerences are quite marked in sorne cases. For
cent of fue total. Over 50 percent was produced by example, the apparel industry provided one-fourth
those three industries plus stone-c1ay-glass and tex- of manufacturing employment and contributed one-
tiles. Considerable diversification occurred from sixth of sector employment while producing one-
1960-67. During this period, the various chemical, twelfth of sector output. In contrast, the pharma-
metals, and petroleum industries began to take on ceutical indus,try produced 26.5 percent of sector
more significan ce. Half the sector income, however, oulput and provided 6.5 percent of sector employ-
was produced by five industries; i.e., apparel, food men and 8.6 percent of sector income. Similarly, fue
products, stone-c1ay-glass, electrical machinery, and leather products industry produced 1 percent of sector
sugar. These trends continued during the 1967-70 output, 3.8 percent of sector employment, and 2.1
periodo After 1970, income produced by pharmaceu- percent of sector income, while petrochemicals pro-
ticals, electrical machinery, instruments, and petro- duced 7.4 percent of output, 3.0 percent of employ-
leum and petrochemicals industries increased rap- ment, and 4.1 percent of income.

Table 9.-Labor Income by Industry Group, 1947-77

1947 1960 1967

Amount Percent- Amount Percent- Amouot Percent-

(millions age (millions age (millions age
Industry of dolIars) of total Industry -of doIlars) of total Industry of doBars) of total

Sllgar mills ____ ~_____ 14.9 26.2 AppareI _________ ,,___ 37.0 20.5 Apparel _____ .______.____ 87.1 21.1
Apparel _________ 14.3 25.2 Sugar _______________ 20.5 11.4 Food products ______________ 40.7 9.7
Tobacco ________________ 6.0 10.6 Food products _______._ 15.5 8.6 Stone-elay-glass ______ 28.6 6.9
Food products _____ ~__ 5.6 9.9 Stone-day-glass _______ 12.7 7.0 Electrieal machinery _____ 27.9 6.8
Alcoholic beverages ___ 2.4 4.2 Textiles ___~_.'_____ 10.4 5.8 Sugar ____________________ 22.8 5.5
Printing and publishing _ 2.3 4.1 Printing and publishing _ 6.9 3.8 Leather products 22.7 5.5
Wood and furniture ______ 1.7 3.0 Tobacco ___ ~__________ 6.7 3.7 Textiles 18.9 4.6
Beer ____________ 1.5 2.6 Wood and fumiture ____ 6.7 3.7 Tobacco _ _~________ 18.7 4.5
Stone-clay-glass ______ 1.2 2.1 Leather produets ~~__ 4.8 2.7 Petroleum _____ ~__________ 15.0 3.6
Soft drink.s _____._____ .9 1.6 Beer __ ~ _____ ~~ _ _~__ 4.2 2.3 Wood and furniture _ 14.5 3.5
Textiles ____________ .6 1.1 Alcoholie beverages __ ~__ 3.6 2.0 Fabricated metals ___________ 13.5 3.3
Soft drinks _________ 3.2 1.8 Printing and publishing __ 11.7 2.8
Paper and products _____ 2.6 1.4 Instruments ____________ 11.2 2.7
Subtotal _______ 51.4
---- Beer ________________ _ 9.8 2.4
90.6 134.8 74.7
=== Rubber and pIastic _______ _ 9.7 2.4
Metals and machinery __ 2.0 3.5 Metals and machinery _____ 25.5 14.1 Alcoholic beverages ___ "__ _ 7.7 1.9
Chemicals ___________ _ 1.2 2.1 Chemicals ___ ._______ ._____ 5.0 2.8 Soft drinks ________________ _ 7.2 1.7
Miscellaneous _____ ._ 2.2 3.9 Miscellaneons __ ~____ 16.0 8.9 Maehinery _____________ _ 6.8 1.6
Petrochemieals 6.7 1.6
Primary metals _____________ _ 6.1 1.5
Paper and products ______ _ 5.4 1.3
PhannaceuticaIs _______ _ 5.1 1.2
Other ehemicaIs _____ _ 3.8 0.9
Transportation equipment 1.7 0.4

1970 1972 1974

Amonnt Percent- Amonot Perceot- Amount Percent-

(millions age (millions age (millions age
Industry of doIIars) of total Industry of dollars) of total Industry of dOl1ars) of total
Apparel _ _ _ _ _ "_____ 133.4 21.9 Apparel 1392 18.5 Appare1 166.9 18.0
Food products ______ 0_____ 56.0 9.2 Food products __ "____________ _ 76.3 10.2 Food products ___ _ 98.0 10.6
Electrical machinery _____ 45.4 7.5 Electrical machinery __ 69.6 9.3 Electrical machinery 91.0 9.8
Stone-clay,-glass ______ 39.2 6.5 Stone-clay-glass _________ 49.0 6.5 Stone-clay-glass ~________ 59.6 6.4
Textiles ___________ ~_ 30.0 4.9 Instruments 33.6 4.5 PetroehemicaIs __________ _ 44.9 4.8
Laether products ______ _ 29.0 4.8 PetrochemieaIs __________ _ 31.4 4.2 Instrumeots ______________ _ 44.0 4.8
Petroleum 24.5 4.0 PetroIeum _________ _ 30.4 4.0 Pharmaceuticals 43.6 4.7
Fabricated metaIs _____ o
21.9 3.6 Textiles _______________ _ 30.0 4.0 Fabricated metals 363.1 3.9
Instruments 21.3 3.5 Fabricated metal _______ _ 29.7 4.0 Textiles 34.7 3.7
Tobacco _______________ _ 21.1 3.5 PhannacenticaIs _______ _ 25.0 3.3 Petroleum ___________ _ 34.3 3.7
Sugar ____________ ._ 21.0 3.5 Leather products _______ _ 24.5 3.3 Printing and publishing 29.8 3.2
W ood and furniture ___ _ 21.0 3.5 Wood and furniture __ _ 23.6 3.1 Leather products 26.3 2.8
Pritning and publishing __ 18.5 3.0 Tobaceo _________________ _ 22.5 3.0 Wood and furniture _____ _ 25.2 2.7
Petroehemicals _________ _ 15.6 2.6 Printing and publishing _ 20.6 2.7 Tobacco _______ "_________ _ 252 2.7
Rubber and plastics ___ _ 14.6 2.4 Rubber and plastics _____ _ 2.7 Sugar _______________________ _ 23.8 2.6
Beer ___________ _ 14.6 2.4 Sugar ______________ __ 20.6 2.7 Rubber and plastics ____ _ 21.7 2.3
AleohoJic beverages _" __ 11.8 1.9 Soft drinks ______________ _ 16,9 2.2 Machinery ______________ _ .21.3 2.3
Soft drink:s _________ . 11.2 1.8 A1coholic beverages ____ _ 15.2 2.0 Soft drinks _____________ _ 20.1 2.1
Phannaceuticals 10.2 1.7 Machinery 13.8 1.8 AIcoholic beverages ______ _ 15.9 1.7
Machinery 8.7 1.4 Beer _____________________ _ 1.8 Beer __ .______________________ _ 12.1
13.6 1.3
Prirnary metals _______ _ 8.6 1.4 Primary metals ___ ._. 10.0 1.3 Primary metaIs ___________ 11.7 1.3
Paper and products _ _ 7.7 1.3 Paper and produets __ 8.6 1.1 Paper and products ____ _ 9.2 1.0
Other chemieals _ _ _~ 4.2 0.7 Other chemicals _______ __ 5.8 0.8 Other chemicals _______ _ 9.2 1.0
Transportation equipment 1.8 ·0.3 Transportation equipment 3.5 0.5 Transportation equipment 4.1 OA

Table 9.-Labor Incame by Industry Group, 1947-77-Con.
1975 1976 1977

Amount Percent- Amount Percent- Amount Pereent-

(millions age (millions age (millions age
of dollars) of total of dollars) of total Industry of dollars) oí total

Apparel ------------ 160.7 16.7


Appare! --~--
181.0 17.6 Appare! ______________ 190.2 16.4

Foad products- ______ 105.7 11.0 Food products _______ . 110.9 10.8 Electrical machinery ---- 129.4 11.1
Electrical machinery -- 90.5 9.4 Electrical machinery ~ 97.6 9.5 Food products ---------- 126.6 11.0
Stone-c1ay-glass ---------- 60.3 6.3 Phannaceuticals --------- 71.9 7.0 Phannaceuticals ~--
99.4 8.6
Pharmaceuticals -------- 58.0 6.0 Instruments ----------- 62.2 6.0 Instruments - - - - - 72.S 6.3
Instruments -_._--~- 48.5 5.0 Stone-day-glass _._-- 53.1 5.2 Stone-c1ay-glass ----- 50.0 4.3
45.3 4.7 Petroleum _________. __________ 42.0 Petrochemicals 4.1
Petrochernicals ----------- 4.1 -------- 47.1
Fabricated metals - - 38.6 4.0 Petroehemicals ------------ 40.1 3.9 Petroleum ------------------- 45.7 3.9
Petroleum -----------~
38.5 4.0 Fabricated metals ----- 38.3 3.7 Machinery -------------- 45.1 3.9
Textiles -----~-
31.1 3.2 Maehinery ------------------_.- 30.8 3.0 Fabricated metals -- 37.0 3.2
Printing and publishing ,_ 30.4 3.2 Printing and publishing ____ 30.2 2.9 Printing and publishing - 31.8 2.7
Sugar ____________ 28.4 2.9 Tobacco _._-_._- 29.1 2.8 Tobacco 28.2 2.4
Tobacco ------------- 28.2 2.9 Textiles -------------- 27.6 2.7 Rubber and plastics - - 27.0 2.3
Maehinery ----~-
25.2 2.6 Sugar _________ ~ 26.7 2.6 Textiles _ _ _ _ _ _ 26.9 2.3
Leather -----~------
24.6 2.6 Leather ------------------- 25_3 2.5 Sugar _~ ________ 26.8 2.3
Wood and furniture --- 23.0 204 Rubber and plastics - - 24.2 204 Leather ------------- 24.5 2.1
Rubber and plastics -- 22.6 2.3 Wood and furmture ----- 22.1 2.1 Softd rinks - - - - - 23.2 2.0
Soft drinks ------------- 20.7 2.1 Soft drinks ~----
21.4 2.1 Wood and furmture __ 20.9 1.8
Alcoholie beverages ----- 15.5 1.6 Alcoholic beverages ---- 16.7 1.6 Other chemicals --------- 20.0 1.7
Beer ------------- 12.7 1.3 Other chemicals ._-- 16.0 1.6 Primary metals -------- 11.9 1.0
Other ehemicals -------- 12.7 1.3 Beer ----------------------- 13.7 1.3 Beer _____________ 15.5 1.3
Primary metals ----- 12.4 1.3 Prirnary metals . _ - - 16.0 1.6 Primary metals --- 11.9 1.0
Paper and products ---- 9.0 0.9 Paper and products ----- 9.5 0.9 Paper and products - - 11.6 1.0
Transportation equipment 4.1 004 Transportation equipment 4.2 0.4 Transportation equipment 4.3 0.4

Source: Puerto Rico Planning Board, unpublished worksheet for income and product accounts.

Table 10.-Comparison by Industry Group Contribu· Table 11 contains a comparison of changes in

tions to lncome, Employment, and Output in 1977 industry group produotion of Puerto Rican income,
[Percentage of sector total] employrnent, and output.
Ineome During the period from 1947 to 1967, those in-
(labor Output dustries which were most important in terms of their
Industry Group :ineome) Employrnent (GDP)
absolute contribution to income, employrnent, and
Apparel ---------- 16.4 25.1 8.3 output were in general also lhe industries whose con-
Electrical machinery - 11.1 904 12.9
Food products ______________ 11.0 9.2 9.1 tributions were increasing most appreciably. They
Pharmaceuticals ____ 8.6 6.5 26.5
Instruments ------- 6.3 8.3 4.9
incIuded apparel, stone-cIay-glass, food products,
Stone-clay-glass ~---.-
4.3 3.6 2.6 textiles, and fabricated metals. If rates of increase
Petrochemicals 1 ------ 4.1 3.0 704
Mach:inery ------ 3.9 304 3.9 alone were considered, soft drinks would have to be
Petroleum ------- 3.9 2.6 3.2 added to lhe Iist and stone-cIay-glass dropped. In
Fabricated metals ~_ 3.2 2.6 2.2
Printing and publishing __ 2.7 1.8 1.1 terms of amounts of increase, apparel far exceeded
Tobacco 1 . _ - - - - 204 2.1 3.8 any other industry in aH lhree categories. For those
Textiles ------------ 2.3 3.2 lA
Rubber and plasties __ 2.3 1.6 lA groups for which data is available, the rate of in-
Sugar ------------- 2.3 0.2
Leather products __ ~ 2.1
3.8 1.0
crease was highest for textiles in all three categories.
Soft drinks _ --------------- 2.0 1.6 1.8 In addition to these industries, electrical machinery
Wood and furniture ____ 1.8 2.6 0.9
Alcoholic beverages 1 __ 1.7 lA 6.1
aud professional and scientific instruments began
Other chemicals _____ 1.7 1.3 0.9 to become significant and to grow with sorne rapidity
Beer ---------- 1.3 1.1 0.9
Paper and paper during ,¡he periodo N either group was large enough
products ... _ - - -
Primary metaIs _. _________
1.0 1.2 0.6 to be reported separately before 1954 and we had
1.0 0.8 0.4
Transportation data ou income and output produced only for the
equipment .._ - - - 0.4 0.1 0.2 period 1967-77. Employment in eleotrical machinery,
1 The wide difference between contribution to output and inecme
however, increased from 1,454 in 1954 to 8,549 in
in these three areas is partlallY due to deficiencies in the methodol- 1967 while employment in the instruments industty
ogy employed which results in the large amount of excise taxes
colIected not being included :in income. rose from 1,056 to 3,284;
Source: Calculated from data in tables 3, 5, and 9. The period 1967-77 was characterized by lhe rapid
Note: Listing is in order of rank in contribution to income. growth of the pharmaceuticals, electrical machinery,

Table 11.-Amount and Rate of Changc in lncrease in lncome, Employment and Output by lndustry Group
1947--67 1949-67 1947-67
Amount Amount Amount
(Millions (Millions (millions
INDUSTRY of dollars) Percentage of dollars) Percentage oí dollars) Percentage

Apparel 52.2 326 24,950 231 95.4 472

Stone-clay-glass 21.1 1,623 3,856 150 45.0 711
Food products _ _ _ _ _ _ _ _ _ _ 16.4 260 4,660 8.02 39.0 557
Tetxiles 14.1 2,014 5,359 370 21.1 3,517
Wood and furniture 9.4 495 2,297 104 13.5 265
Tobacco ___ ... 8.0 119 -46 -0.6 NA NA
Printing and publishing _ _ ._~_ 6.6 254 939 64.4 NA NA
Beer .. _.________________ 6.0 353 975 122 24.3 517
Soft drinks 4.6 460 920 104 12.5 625
Alcoholic beverages _________ 3.3 122 -119 -7.9 49.8 113
Sugar 1.1 6.6 -10,287 -72.2 -3.0 -7.8
Machinery __._ _ _ _ _ _ _ _ _ _ 538 87.2
Fabricated metals 3,368 1,086

Amount Amount Amount
(Millions (Millions (Millions
INOUSTRY of dollars) Percentage of dollars) Percentage of doIlars) Pereentage
Drugs .._.... __ ........__ ~....._. __. _.._._ 40.7 1,017 7,976 576 584.5 1,171
Electrical machinery _ _ ._.. ____ 36.5 167 5,051 59.1 223.3 582
InstruInents ._ _ _ _ ._.~ _ _ __ 25.2 332 8,716 265 56.9 327
Apparel __ ~ ____ -:----.. ______ 17.3 25.4 445 1.2 73.1 63.2
Petrochemieals ._.___ ._.. _ _ .__ _ 16.0 308 3,213 278 87.4 380
Maehinery __._._ _ _ _ _ .___ ._ _ 15.0 283 3,685 319 61.9 553
Food products ~ _ _ _ ._______ _ 10.7 47.1 2,782 26.6 41.0 58.9
Petroleum ___ ._..~_, _ _ _ _ ._ 8.4 71.8 1,693 83,.5 -8.1 -19.2
Leather products _ _ _._._ __ 6.8 38.2 -4,906 -47.1 -12.1 -38.7
Fabrkated metals _ _ .______ _ 6.1 57.5 122 33.2 15.1 70.6
Other chemieals C " ' C - - - 6.0 200 1,082 137 12.3 262
Printing and publishing _ _ ._~ ___ 5.1 55.4 242 10.1 1.6 17.6
Soft drinks ...__ 4.8 85.7 479 25.6 13.8 95.2
Rubber and plasties _ _ _ _ _ .__ ... 4.6 60.5 -1,003 -31.0 14.9 121.1
Aleoholic beverages _ _ .______ . 2.7 48.3 606 435 5.4 5.8
Primary metals ~ _ _ _ _ _ _._._ 1.4 29.2 334 38.6 -5.2 -46.0
Paper and paper products ~ __ ...:. __ _ 1.0 23.8 242 10.1 ? ?
Transportation equipment .. _ _ _ _ _ 0.6 46.1 -510 -76.1 0.8 33.3
Stone-clay-glass __ ~ _ _ _ _ ~_ 0.1 0.45 -1,218 -19.0 -2.6 -5.6
Heer -........__.____....__ ..~~ __ ...__ -0.7 -9.1 -142 -8.0 -14.9 -59.4
Wood and furniture . -1.9 -16.8 -700 -15.5 -.5 -2.7
Tobaeco ______ ~ _____ ~_ -2.0 -13.6 -4,070 -57.6 27.4 60.9
Textiles -2.7 -18.2 -2,209 -32.4 0.2 1.2
Sugar _ _ ._..._~' __ ........ _.._ ..___ _ -5.2 -29.2 -1,217 -30.8 -32.3 -91.5

Listed in order of amount of increase in income during periodo Note: Employment inereases for first period are from 1949 to 1967,
Increases in ineome and output in millions of constant dolIars. while ineome and output increases are for 1947 to 1967.
Actual_ amounts of output deflated by U.S. wholesale price index
(1967 base) for industry group. Actual amounts of income deftated SOUIce: Puerto Rico Planning Board, unpublished worksheet for
. by consumer price indexo income and produet accounts.

and instruments indnstries. AppareI, petrochemicals, The decline oí the sugar industry was continuous
machinery, and food products aIso grew significantIy. throughout lhe periodo
In general, those industries which were making lhe
Iargest contributions to income, employment, and Changes In Sector Characteristics and
oUlput in 1977 were also the ones whose contribu- Conditions
tions grew most rapidly during lhe periad 1967-
77. The major exception is stone-c1ay-glass which Dependency on External Trade and CapitaI.-The
declined, probably because of the drastic fa11 in con- scarcity of natural re80urces in Puerto Rico, indicated
struction during lhe last 3 years of lhe periodo in chap1er n, led to the evolution of an industrial
A number of industries, however, declined during development strategy based primarly on the process-
the periodo These incIude beer, tobacco, wood and ing of imported materials. N onetheIess, in the ear1y
furniture, textiles, and stone-cIay-glass. Qutput and years of the deveIopment program, lhe more im-
employment also decIined in leather products; em- portant industries in the mannfacturing sector were
ployment declines were also recorded in rubber and those utilizing local source materials. For example,
plastics. These declines represent, in part, the effects in 1947, over 70 percent of sector oulput was in the
of economic recession as well as industry conditions. food products (incIuding sugar, beverages, canning
(See charts 2 and 3.) and preserving, and other food prodncts), tobacco,


Million $ 1954
Million$~I:.:.'5~4_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _- ,
2400 2400

ZiGO f- 2100 - ",

1800 r I

.1 1500
1200r- 1200

900 r '00

600 f- .,.....- ....... ~ 600

.."." Capital IntenSlve lndustry
__ .1 ___ 1. __
o '-"-'- _.
IW~_I.I~II~_I~ __ E~~_I.I~~ __ 19Y~~I.HmINllmlmlmlm~w

and stone-c1ay-glass industries. Even in 1960, 44 ment in sorne industries is shown by eqnity ownership
percent of sector output was produced by those in 1973 as follows:
industry groups. By 1977 these industries produced
only 21 percent oi sector output. In 1950, capital Table IZ.-External Stockholders Equity as a Percentage
goods, raw materials, and intermediaJte goods im- of Total Equity
ported were 24.5 percent of output (GDPj. By 1963, Industry Percentage
this ratio had increased to 29.4 percent. It remained Drugs _________________ ______________ ._ _ _ __
rela1ively stable for the next 10 years and then in- Petrochemicals ____________-_____________ ________ _ ~
Other chemicals ___________ ____________._
creased sharply from 28.4 percent in 1973 to 40.1 Petroleum refining ________________ ___ _

percent in 1977. Petroleum products _______________ _ _ _ _ _ __ ~
Primary metaIs ___ __________
~ ________ _ ~
As has been indicated, production for external Fabricated metals _______ _____ ~ ____ _ 99.5
markets was a major element in Puerto Rico's devel- .l\1achinery ____________________ ______________ _
ElectricaI machinery ____________________________ _ 98.9
opment strategy. In 1950, merchandise exports from
Puerto Rico were 33.6 percent of GDP. In 1960, Total group ________ ~ _____________ _ 98.3
the ratio had reached 37.2 percent but in 1970 was Source: Puerto Rico Planning Board, unpublished worksheet fo!
on1y 34.8 percent. After 1970, i1 increased qnite income and product accounts.
rapidly and reached 46.9 percent in 1977.
A third major element of Puerto Rico's develop- An examination of changes in the division of sec-
ment strategy was the stimulation oí external invoot- tor net income by distributive share may be a more
ment in Puevto Rico. Adjusted net inflows of external direct indication oi changes in capital intensity.
capital increased from 6 percent of GDP in 1950 Changes in profits and labor income as percentages
to 13.8 percent in 1960, 20.3 percent in 1970, and of net income produced by the sector have been as
24.7 percent in 1977. The extent oí external invest- shown in table 13.


Mlllion $ 1954 Million $ 1954
700 700
60Q- 600

50Q - 500
400 - / 400

300 -
- /

100 -
Captial Inlensive Induslry . __ .---
.- .- 200

IOOr- _ _ _ _ _ _ _ _- - - - - - - - - - - -
-\..-.-._._.- 100
O. __1._ __.L._J_. _ _ ._'_. ._'_.-'._.

Table lJ.-Relation of Profits and Labor Income to Net Domestic Income
[In percentages]

1950 1955 1960 1965 1970 1972 1974 1976 1977

Puerto Rico:
Profits - - - - - - - - - - 30.6 36.4 37.5 39.9 38.4 41.4 50.5 56.9 59.3
Labor Income ---~-~------------------ 69.4 63.6 62.5 61.1 62.6 58.6 49.5 43.1 40.7
U.S. Mainland:
Labor Ineome 73.2 76.8 81.4 77.9 86.3 83.2 87.9 82.1

Source: Plann1ng Board, 1977 Economic Report fa the Governor,' unpublished worksheet far income and products accounts.

The shift in relative shares during lhe 1970's is output, employment, and Puerto Rican income by
significant as is lhe fact that by 1974 the share going those industries which might be considered capital
to profit was greater lhan that going to labor and intensive and those which might be considered labor
by 1977 was 45.7 percent greater. The difference in intensive. For lhis purpose, we have considered that
lhe direction of movement between Puerto Rico and fuose industries for which the returns to property
lhe mainland is evident. are more than 50 percent of lheir contribution to
net income to be capital intensive, and lhose for
We have attempted to make some assessment of which labor income is more than half of net income
the relative importance of labor- and capital-in ten- to be labor intensive. On the basis of lhat criterion,
sive industries by examining the contribution to Puerto Rican industries may be c1assified as follows:

Labor intensive Capital intensive

Apparel Prior to 1'967
Textiles Chemicals (as a group)
Leather Alcoholic heverages
Sugar milling
Beer Mter 1967
Other food products Pharmaceuticals
Wood and furniture Petrochemicals
Printing and publishing Petroleum refining and products
Paper and paper products Machinery
Stone-clay-glass Electrical machinery
Rubber and plastics Alcoholic beverages
Soft drinks (until 1967) Soft drinks
Metals and machinery (as a group until 1967) Instruments (1976 and 1977)
Primary metals (after 1967)
Fabric¡oted metals (after 1967)
Transportation equipment (after 1967)
Other chemicals (after 1967)
Instruments (1967-75)

Changes in the relative importance of the two used. Briefiy, the attempt is to measure lhe amount
groups are summarized in table 14. (Seel tables of output associated with an employee, or changes
5,6,7, and 9 for industry details,) in lhat output. These measures plus olhers have
empírical as well as theoretical dífliculties.
Notwithstanding such difliculties, some attempt
Productivity Chauges.-In discussions of produc- to show changes in productivity which have ac-
tivity in Puerto Rico reference is usually to labor companied fue changes in industrial structure in
productivity. It is sometimes measured by value Puerto Rico may be useful in providing an under-
added per employee or value added per dollars of standing of fue nature of lhe existing manufacturing
payrol!. Profits per worker may also sometimes be sector.

Table 14.-':"Relative lmpor.tance of Labor and Capitallntensive Industries,

(Percentage of Manufacturing Sector Contribution)
Income (Labor) Employrnent Output
Item 1947 1967 1970 1974 1977 1947 1967 1970 1974 1977 1947 1967 1970 1974 1977
Labor intensive industries ---------- 86.4 79.2 76.3 68.9 56.4 90.9 83.1 79.5 76.5 62.0 70.9 61.6 60.7 47.6 32.1
Capital intensive industries _._._... _---- 7.8 18.5 21.0 29.3 41.4 3.9 13.9 15.8 21.7 36.2 23.4 35.4 38.0 51.9 66.6

SoUrce: Tables 5, 6, and 9.

Table H.-Value Added Per Employee by Major lndustry Graup 1958-72
[In thousands Di current dollars]

change in
constant 1954 Value added
Rank 1954 1954 1958 1963 1967 1972 dollars = 100 1 payrall

Chemicals - - : - - - - - - - - - - - - - - - 4 ·5.2 6.2 19.7 34.4 50.2 441 7.68

Petroleum ---- - - - - - ; - - - - - - - - - D D D D 42.0 4.44
Machinery except electncal ------------------ 7-8 3.8 5.9 8.0 12.1 16.9 147 2.93
Primary roetals - - - - - - - - . 3 5.3 4.5 8.7 10.8 15.0 60 2.72
Printing -------_.---------_.------------ 9 3.4 4.5 7.2 8.0 14.1 134 2.50
Metal fabricating - - - - - - - - - - - - 2 5.5 5.1 6.4 11.0 14.9 52 2.83
Instruments ---------------------------- 14 2.2 3.4 6.6 8.4 13.9 248 2.91
Food ---------------------------... 7-8 3.8 5.6 9.0 12.3 12.4 83 3.11
stone-clay-glass ------------------- 13 3.0 4.7 7.1 9.4 11.7 117 2.52
Electrical machinery - - - - - - - - - - - - - 10 3.3 7.2 9.1 9.9 11.6 97 2.93
Paper ---------------~-------------------­ 1 6.8 6.1 6.5 9.5 11.4 -5 2.17
Tobacco ---------------------------- 18 1.2 2.2 3.9 5.9 10.3 394 2.84
Transportation equipment - - - - - - - - - - 6 4.5 D D D 9.6 20 2.18
Miscellaneous manufacturing - - - - - - - - - - 11-12 3.1 3.0 3.8 5.2 9.5 7! 2.50
Furniture _~ __________________________ _ 15 2.0 3.0 4.2 5.6 9.1 151 2.26
Textiles _______________ ~ _____ _ 11-12 3.1 3.4 4.1 6.1 8.6 134 2.40
Rubber and plastics - - - - - - - - - - . - - - D 3.9 5.4 6.4 7.9 1.96
Wood products -------------------------- 5 4.6 2.6 4.1 -.8 6.9 -16 1.84
Apparel __________________________ _ 17 1.8 2.5 3.4 4.2 6.4 207 2.03
Leather _______________________________________ _ 16 1.9 2.6 3.4 4.5 6.0 63 1.43
Pharmaceuticals ________________ _ 7.4 30.3 56.3 85.3
Women's and infants' undergarments ------ 3.0 3.5 4.2 6.4

1 Implicit Price Deflator for Gross Products, 1954 = 100_

Source: U.S. Bureau of Census, Economic Census of Outlying Areas, Puerto Rico: Census of Manufactures (various years).
D-Data unavailable. ,--

Tab1e 15 presents a comparison of industries in cline in the face of high1y competitive Caribbean
terms of va1ue added per emp10yee for certain years supp1iers.
from 1954 to 1972 (data was not availab1e for years The dramatic inerease in scientific and surgical
1ater than 1972). Industries are listed in order of instrument manufacturing is foIlowing on the heels
the amount of va1ue added per emp10yee in 1972. of the pharmaeeutica1s growth, particu1arly where
The chemicals and petro1eum industries are product c1assification, e.g., chemieally treated or
readily identified as being far ahead of other indus- composed measuring deviees, is vague.
tries in labor productivity. The high ranking of the
Using net earnings (profits) per emp10yee as a
chemicals industry is derived mostIy from the high
measure of productivity permits a comparison for
capital and relatively 10w labor requirements in the
later years. Tab1e 16 presents a cOmparison of in-
pharmaeeutieal industry.
dustry groups for se1ected years from 1967 to 1976.
Other eapital-intensive industries foIlow in the
ranking with the more labor-intensive industries
making up the bottom portion of the listing. This Table 16.-Net Earnings (Profits) Per Worker in
Major lndustry Group 1967-76
contrasts somewhat with the 1954 rankings which
show a very much narrower range in productivity 1967 1970 1972 1973 1976
differences and in which a number of more high1y Chemicals _____________._ $18.27 $16.36 $20.21 $23.93 $55.04
labor-intensive industries rank relatively high. Electrical machinery _____________ _ 3.55 4.97 6.67 7.17 14.91
Machinery except electrical _ 2.19 3.23 9.68 16.20 12.40
The greatest percentage increases (rate of growth) Petroleum ___________ _ 9.18 9.78 6.28 24.80 10.80
Instruments ___________________ _ 1.91 2.99 3.37 3.80 7.76
in labor productivity oecurred in the chemica1 Fabricated metals ________ _ .47 1.82 3.45 4.04 7.20
(441 percent), tobacco (394 percent), instruments Miscellaneous industries ___ _
Tobacco _____________ ._
1.66 1.78 2.76 2.66 6.05
2.35 2.61 2.39 2.97 5.67
(248 percent), and apparel (207 percent) indus- Food _________________ _ 1.85 2.16 1.91 2.46 4.85
tries. Rubber and plastics _____ _ .46 .95 .75 .36 4,37
Transportation equipment _ .96 .79 .18 1.49 3.52
Printing ____________ _
The increase in productivity in tobacco is in Paper ___________________ _
.81 1.20 1.23 1.33 3.22
1.96 1.66 1.54 1.09 3.21
sharp contrast to this industry's 10ss of finns, table Textiles ______________________ _
.77 1.09 1.28 2.20 2.75
4, and emp10yment 10ss, tab1e 6. The discrepancy Stone-c1ay-glass ______ _ 1.74 1.04 1.74 1.41 1.88
Apparel _________ .____ _ .77 1.11 1.27 1.22 1.81
reflects a structura1 change within the industry itse1f. Leather _________________ _ .75 .76 .96 1.26 1.64
Primary metal ____________ _
In 1972, the only cigarette manufacturing plant in Furoiture and wood __ ._____ _
2.24 2.90
Puerto Rico eontinued as a high1y productive pro- Total industries _________ _ 2.00 2.48 3.53 4.57 9.48
duction unit while the more labor-intensive cigar- Source: Puerto Rico Planning Board, unpublished worksheet for
making industries (hand roIling) continued to de- income and product accounts.

While there are sorne ehanges in the relative posi- Table 17.-Comparative Ranking of Industries by Value
tion of industry groups, table 17 presents basically Added Per EmPloyee and Labor Cost as a Percentage
the same pieture as existed in 1972 for value added Cost of Value Added (1972)
per employee. The ehemical, electrical machinery, Value added/employment Labor cost/value added
petroleum, machinery, and instruments industries
ChemicaIs Wood products
rank highest. The more labor-intensive industries Petroleum Leather
sueh as printing, paper products, textiles, stone-c1ay- MachineIY except electrical
Primary metals
Rubber and plastics
glass, apparel; leather products, and wood and fur- Printing Paper
mture rank lowest. Metal fabricating Transportation equipment
Instruments Fumiture
A comparison ranking of industries by ea) value Food Textiles
Stone-c1ay-glass Miscellaneous manufacturing
added per employee and eb) labor cost as a pro- Electncal machinery Stone-c1ay-glass
portion of 'value added was undertaken to deter- Paper Printing
Tobacco Primary metals
mine whether differences exist between the two Transportation equipment Tobacco
eriteria. Miscellaneous manufacturing Food
Funtiture Metal fabricating
Textiles Instruments
Rubber and plastics Machinery except elecrncal
Wood products Electrical machinery
Appare! Petroleum
Leather Chemicals

Chapter IV.-Comparative Analysis of
Industry Groups and Implications for
Sector Policy
This chapter makes a comparison of industry decentralization, or dispersion; and variations in
groups in terms of their relative contributions to market and growth prospects.
easing Puerto Rico's economic problems. An attempt There may be wide variations in the value to
is made to c1assify industries in accordance with Puerto Rico of investments in the manufacturing
theirability to make such contributions. Conc1u- sector. For example, there are variations due to
sions are then drawn as to the implications of the types of industry and sources of investment; whether
analysis for Puerto Rico's policy towar4 the sector. the investment is by residents or nonresidents.
There are a number of objectives to which the Unfortunately, data is not available which would
development of the manufacturing sector might be permit as fum results as are desirable. There does
expected to contribute. What these objectives are, not appear to be any data available on investment
will of course condition the choice among policy by industry groups. Data on profits are drawn from
options. From that perspective, they may be con- various sources, it may lack comparability from
sidered as criteria for choice as well as objectives. period to period, and is incomplete in coverage.
The analyses made in the previous chapters indicates There is no available information on the division
that, under Puerto Rican conditions, the most ap- between income accruing to residents and non-
propriate objectives or criteria for the manufactur- residents. Such data as are available tend to be at
ing sector are: too high a level of aggregation, and are usually at a
2-digit SIC level, which covers a wide variety of
1. A sustainable rate of growth in the sector's industries with disparate characteristics. Proxies or
contribution to the Puerto Rican economy. surrogates must be frequently used. Samples used
2. A reduction of unemployment in order to re- may not be representative. Despite these difficulties,
duce the human, social, political, and economic the study uses the available data as indicators of the
costs of unemployment. direction in which the industrial sector is moving.
3. Achievement of a pattern of income distri- An industry's contributions to output, employ-
bution which avoids concentration of a large share ment, and income are each, to sorne degree, measures
of the total in any relatively small population group. of that industry's contribution to Puerto Rico's de-
4. Limiting Puerto Rican vulnerability to changes velopmeut. However, in view of the divergence be-
in conditions not subject to its control, inc1uding tween output on Puerto Rico and income accruing
(a) world trade and demand conditions; (b) cor- to Puerto Rico, output is considered as a relatively
porate policy and financial considerations unrelated poor measure of an industry's contribution to em-
to Puerto Rican economic conditions; and (c) ployment and local income generation objectives.
changes in conditions and the nature of relation- Increased employment is, of course, an important
ships within the U.S. Federal system. Puerto Rican objective. Standing alone, however,
it also seems to be an inadequate measure. Concep-
In addition to these objectives or criteria, Puerto tually, contribution to net income (in the national
Rican policy toward industries must also take iuto accounts, not the individual firm, sense) accruing
account such considerations as rates of profit and to Puerto Rico seems to be an appropriate measure
their role in private investment and location deci- of an industry's contribution to Puerto Rican objec-
sions and government tax and incentive program tives. What makes this a good measure is that it is
decisions; variations in industry practices with re- essentially a composite result of employrnent, wage
spect to corporate structure and plant location, rates, employee benefits, and profits. The inc1usion

of taxes paid in the gross national income frame- intensity is not directly measured by the aboye ratio,
work seems appropriate since (a) to the extent they but as an ~ndirect measure, along with known in-
are paid by Puerto Ricans, they would usually rep- dustrial profitability, it seems reasonable to infer
resent a reallocation from surplus spending units that Puerto Rico benefits less from these industries
to deficit spending units and not transfers to off- under this criterion. Puerto Rican ownership and
island earning units, (b) under the investment in- capital contribution to these industries is particu-
centive program, taxes paid by nonresidents are lady nonexistent.
insignificant, and (e) the ability to increase Puerto
Rican income through the imposition of taxes is one
of the policy options to be analyzed. FACTORS CONDITIONING
LABOR INCOME AS A RATIO OF Relative Profitability
SECTORAL NET INCOME Profitability (return on eqnity) is not a sufficient
guide to an industry's contribution to the Puerto
A comparison of the labor income to net income Rican economy. However, it is a very practica!
by industry is shown in table 1. This ratio is used consideration which must be taken into account in
here as a quasi-measure of factor intensity. Tnas- the development of governmental policy since it is,
much as Puerto Rican data is not available to meas- of course, an extremely important consideration in
ure industrial capital stock either in a sectoral ag- private investment decisions. Tt also can be an im-
gregate or by individual industries, the study uses portant consideration in governmental incentives
the income ratio to rank industries. The lowest ratio and tax policy decisions. The way profitability may
would tend to show relatively high capital in- act as a constraint on obtaining the most productive
tensity, while the highest ratio would tend to show investment in terms of generation of Puerto Rican
low capita! intensity. income is examined below.
The return to capital, which is the obverse of the The comparison of rates of profit by industry
aboye ratio assuming other factor inputs as held groups presented in this section uses unpublished
constant, shows a tendency to higher profits in the data provided by Fomento. The ratios were calcu-
sector. Given the industrial ownership structure, lated by Fomento based on pro forma tax returns
where foreign capital has tended to concentrate in submitted by industrial firms to the Puerto Rican
high-return industries, the analysis indicates that Treasury. The possible weakness of this data should
the relative income going to Puerto Rican factors of be recognized and, therefore, the implications of the
production is declining. It is recognized that factor analysis should be used with the greatest caution.

Table l.-Labor Income as a Percentage of Net Income by Industry

Industry 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977
Group I-Highest:
Furniture -------------_._--- ---------- 83.0 82.1 81.2 80.1 79.0 84,4 80.7 88.5 87.8 88.4 82.0
Printing and publishing __ .. ___ 82.7 81.2 74.7 81.9 85.5 83.4 85.3 83.5 81.0 75.0 86.0
Leather products _________ ~ _____._ 73.6 77.6 82.4 82.6 82.6 81.8 78.1 75.3 74.1 76.7 74.0
Transportation equipment _ _ _ _ 71.2 72.6 78.0 80.2 79.0 81.7 87.4 77.0 78.3
Apparel --------------------- 76.7 77.4 78.2 77.5 76.9 74.9 77.1 77.2 78.4 73.7 72.6
Stone--clay-glass ~~~-~-~- 69.7 61.4 72.2 79.8 72.9 74.2 79.4 77.6 83.8 84.4 68.7
Group ll-High Middle:
Rubber products ___ .__ .._.~~ __ 85.0 80.8 76.5 70.7 85.6 91.5 70.0 72.3 61.8 62.9
Textiles __
.... _... __ ...... .. _-- ...-._._- 78.5 77.8 77.3 73.0 69.4 72.6 65.0 62.4 63.6 70.1 63.7
Paper producís __..___ ._._.~_.. ___ 67.1 66.9 67.5 75.1 84.8 81.4 82.2 58.9 61.4 62.6 61.7
Food products .._~ __.. ________ 68.0 65.4 66.7 68.4 66.8 72.5 73.8 69.5 66.7 62.5 69.4
Primary metals ~...._. __ ... ___ .___ . 55.3 66.8 79.8 79.8 79.8 76.8 70.7 52.9 58.9
Other chemicals ._~",, ____. _ . 84.6 67.6 59.4 60.8 68.8 65.5 55.5
Group m-Low Middle:
Tobacco products ..... .......----- 53.0
Fabricated metal products -._._.. 66.5
56.7 61.9 57.9 54.2 64.1 63.2 73.9 57.0 53.8 51.1
85.9 78.1 69.8 59.4 59.0 60.4 53.7 54.9 54.4 51.6
Instruments .... _--_ _--_
.... ....-._._._. 65.7 62.9 60.7 58.0 55.5 58.6 56.1 60.3 58.1 44.5 45.0
Group IV-Low:
Nonelectrical machinery .. - .. __ .....- 70.6 70.1
Electrical rnachinery ...... .... __ _-_ ..... 50.2 45.7
Petroleurn product and refining - - 39.9 44.7 43.4 41.1 41.6 52.3 29.6 20.5 48.6 46.7 41.1
Petrochemicals ....-._ .... ... _ _-_ ....- 34.4 55.1 56.7 77.9 30.2 32.7
Group V-Lowest:
Chemicals (aH components) _.. _- 21.1 23.0 28.0 28.1 29.8 24.4 23.3 21.5 20.7 16.0 16.0
PhannaceuticaIs -_ _-
_ .. .. -._....-
Sector as whole ........ .... _--_. 61.9
10.3 9.3
11.1 11.0 12.6 11.5 11.1 11.8 11.7 11.0 11.4
63.4 62.6 32.0 58.6 34.6 49.5 49.7 43.1 40.7

Source: Puerto Rico Planning Board, Income and Product Accounts, (unpublished worksheet data).


Table Z.-Profit as a Percentage of Equity by Industry

1967 1968 1969 1970 1972 1973 1974 1975 Average

Puerto Rico Puerto United Puerto Rico Puerto United Puerto Puerto United Puerto
Industry group Rico States Riro States Rico Rico States Rico

Printing and publishing _._---_ .. _--- 32.4 36.7 34.5 11.3 35.3 45.2 31.6 12.7 29.6 21.4 11.8 29.8
Instruments --------------_._------- 17.6 38.1 46.6 14.5 28.6 22.7 23.7 15.2 24.9 23.1 13.7 27.9
Chemicals ------------------------- 24.6 19.1 20.9 11.6 20.2 46.6 34.1 14.2 20.5 17.6 15.2 25.4
Nonelectrical machineIY _____ 21.4 17.3 35.0 9.9 35.0 24.6 18.2 12.8 22.0 17.3 13.5 23.8
Electrlcal machlnery --------------------- 20.1 24.3 26.6 9.2 29.4 16.8 26.7 12.6 22.8 20.6 9.0 23.4
Tobacco products ____________ 11.2 6.4 46.3 15.6 13.3 28.1 26.3 14.4 31.9 16.0 15.6 22.4
Apparel -------------------------- 21.3 19.2 20_0 9.6 19.2 28.0 23.7 11.0 21.6 '21.0 21.7
Fabricated metals _________________________ 19.3 20.5 17.6 8.6 18.0 24.7 21.9 13.6 22.4 15.4 13.1 20.0
Transportation equipment 13.1 27.2 19.6 6.4 -19.6 44.3 12.9 30.0 58.8 19.1
Wood and lumber ____________________________ 8.9 6.0 18.6 20.3 27.8 20.5 18.9
Textiles ------------------------- 13.7 17.6 33.2 5.1 33.2 9.0 19.3 8.9 16.4 6.4 4.' 18.6
Rubber and plastics _______ 8.9 9.6 9.5 7.1 11.5 16.4 14.5 11.7 19.0 15.2 8.0 18.3
Fumiture _________:__________________ 12.1 6.7 7.8 5.8 21.1 15.4 13.0 42.9 22.1 18.0
Paper and products ____________________ 19.1 22.8 4.5 7.0 '.2 28.8 23.0 12.5 24.8 11.5 12.6 17.3
Leather products __________ . 20.4 17.0 13.2 9.5 11.5 13.9 16.0 9.3 18.9 22.0 16.6
Food products _______________ .__ 23.0 26.8 15.6 10.9 15.7 13.0 13.5 12.3 7.4 17.2 14.4 16.5
Petroleum refining and products ___ ._ 30_9 lOA 15.5 11.1 11.8 13.8 25.3 11.2 13.5 6.9 12.5 16.0
Primary metals _____ ._____________ 23.1 14.5 3.0 7.1 3.5 10.9 46.3 9.8 19.9 2.4 8.5 14.1
Stone·clay-glass ___________ .___ 6.5 3.0 11.9 6.9 12.7 17.1 23.5 10.8 25.7 2.4 6.8 12.8

Source: Unpublished data provided by Fomento. U.S_ rates calculated from fue U.S. Federal Trade Commission, Quarterly Financial Report
for Manufacturing, Mining and Trade Corporation, various years. U.S. rates are for profits after taxes. Puerto Rican rates are for corporations
receiving tax exemptions.

Table 2 compares profit rates in the various in- compared with the more labor-intensive industries.
dustry groups in 8 years and with V.S. mainland Exceptions to this are apparel, and possibly tobacco
rates (after taxes) for 3 of those years.·' products, both of which appear in the high profit
In considering the Puerto Rican rates, it should group. Tobacco, however, might perhaps better ap-
be borne in mind that the exemption from U.S. pear in the second group, since 2 of the 8 years
corporate income taxes tends to distort the rates show relatively large profits without which its range
in two ways. First, there may be sorne tendency would be much lower.
for firms with operations in both Puerto Rico and Rates of pmfit for industries falling into ¡(he first
the mainland to manage their accounts in such a group substantially exceed the aftertax profits of the
way as to maximize profits attributable to their same industries on the mainland for the 3 years for
Puerto Rican operation. If so, such a practice would which comparisons were made.
tend to introduce an upward bias into Puerto Rican In 1969, Puerto Rican industry rates ranged from
rates. On the other hand, the provisions of section double to triple ¡(he corresponding mainland rates.
931 of the Revenue Code, which provided for ap- In 1973, they ranged from 140 percent to 250 per-
plication' of Federal income taxes on the Puerto cerit of the maiuland rates, and fmm 103 percent to
Rican profits upon repatriation, tended to lead firms 289 percent of those rates in 1970. Sorne tendency
to accumulate large cash or other holdings in Puerto toward a narrowing of the spread seems to be present
Rico, thus tending to increase the equity base on for the period 1969-75.
which profit rates are computed. That this is in fact Industries falling into the second group in most
the case seems to be suggested by balance sheet data cases have exhibited a consistent1y and significant1y ! 1,
in the report on the samples used which seem to lower rate of profit than those falling into the fust l'
show unusually large holdings of cash and "otber group. Like the first group, they tend to have a
investments" on the asset side which is then re- higher rate of pmfit than do similar industries on
flected in what seem& to be an unusually large the mainland. The range from highest to lowest is
"accumulated surplus" item as part of stockholders' even greater than for industries in the first group.
equity on the liability side. It is probable that this Three, printing and publishing, apparel, and fabri-
teudency more than offsets the first and that profits cated metals, out of the twelve such industries fall
rates from operations in Puerto Rito are higher into the high profit dass. Two, primary metals and
than reflected in accounting figures. stone-clay-glass, have lower profit rates than any
As was the case with other indicators, industries other industries. Five are at the high middle, tbree
tend to cluster into groups. It appears that there at tbe middle, and two at the low middle levels.
are at least three possible groupings by rate of profit; Comparison of Puerto Ricau profit rates with after-
a high, middle, and low rate group. Finer dassifica- tax rates for the same industries shows tha,t the
tion could be made but would serve little purpose Puerto Rican rates are in all cases aboye, or well
here. These data suggest that profit rates tend to be aboye, the maiuland rates.
higher in the more capital-intensive industries as Differences between Puerto Rican and maiuland

profit rates in 1973 and 1975 are summarized in year periodo This change goes in the right direction
tabIe 3. to reduce the postexemption tax shock. However,
the remaining issue in this section deaIs with the
Table 3.-Ranking oi Industry Groups by Differential application of a higher tax rate possibIy appIying
Between Puerto Rican and Mainland Profit Rates, to industries where there exists a greater capacity
Percentage of Excess of Puerto Rican Rate to pay taxes. In this section, an analysis is made
1973 Excess 1975 Excess of what wouId be the effects of imposition of a cor-
Primary metaIs ______ 358 Transportation equipmenL 270
porate ineome tax with illustrative effective rates
Transportation equipment.. 241 Electric machinery _ _ o. 129 of 20 percent or 40 percent. In making the analysis,
Petroleum refining and Rubber and plastics ___ 50.0
products _ _ _ ._____ . 218 Printing and publishing _ 8104 Puerto Rican profit rates are reduced by 20 percent
Stone-clay-glass ________ 210 Instruments _.~. ___ .. _ 68.6 and 40 percent, respectiveIy, and compared with
Printing and publishing ___ 145 Textiles ... __._. ___ .__ . 45.5
Chemicals ___ .__ .______ 130 Machinery .. _."_'_"'___ 2704 mainland aftertax rates in 2 years, 1973 and 1975."
Apparel ~__________ 119 Food products __ .... __ .__ 19.4
Textiles ________ ~_ 174 Fabricated metals _.. __ ... 17.6
TabIe 4 shows the changes in the relation between
Electric machinery ______ 104 Chemicals ._._... ___ ~..... 15.8 Puerto Rican and mainIand aftertax profit rates
Paper and paper products 78.2 Tobacco _____ .___ .... __ 2.6
Tobacco _______________ 77.7 Paper and paper products -6.7
which would result from imposition of eorporate in-
Leather producís ____ .. _._ 70.2 Petroleum ___ ._._._.... ___ -44.8 come taxes with either of the illustrative rates.
Pabricated metals ._.___ 57.6 Stone-clay-glass ___ ... __ ...'" -64.7
Instmments ______ ._____ ._. 49.1 Primary metals .... _ .. ___ -71.8 Based on tabIe 4, industries may be placed in
Machinery ____ ._____ 35.8 Apparel ~.... _..... _ .. _.. _____ NA
Furniture ___________ 15.2 Leather _ _ _ _ _ ._.... _ NA groups in accordance with effects of laxes on eom-
Food products ___.___ 5.5 Furniture . __ ....... ______ NA parative PueNO Rican and mainland rates of profit
Rubber and plastics ____ -64.0
as follows:
NA-not availahle.
Source: Calculated from documents of Fomento and FTC Quartedy Imposition oi 20 Percen! Effective Tax Rate 1
Financia! Report: Manufacturing, Mining, Trade Corporations. Various
years. Group l.-Puerto Rican aftertax profit rates higher than
mainland rates in all inSltances:
Printing and publishing
IIIustrative Effects of Introducing Corporate Apparel
Taxation Leather products
Electrical machinery
Effect on Projits.~The aboye anaIysis of rates 01' Instrumenrts
profit has been made on the basis of continuation 01' Chemicals
paSll: freedom from Commonwealth and Federal cor- Textiles
poration income taxes. This situation has changed
1 This method understates profit rates for firms making a profit since
under the alteration introduced by the present Gov- profits and losses of all firms in the industry are added to arrive at
ernment in the HA. SpecificalIy, the amended HA total profits. We do not know whether losses were proportionately
reduces the exemption to 90 percent through the higher or lower in Puerto Rico than on the mainland. 1973 and 1975
were chosen since they are the most recent years for which both
first 5 years and gradually to 50 percent in a 20--25- Puerto Rican and mainland data are available.

Tab_Ie 4.-Sensitivity Di Profit Rates in Puerto Rico to Removal oi Tax Exemption-Federal a:ndlor Puerto Rican
[In percentages]

Puerto Rican Puerto Rican

Mainland rate rate with 20% tax rate witb 40% tax Puerto rucan Puerto Rican
average rate average rate
Industry group 1973 1975 1973 1975 1973 1975 with 20% tax with 40% tax

Printing and publishing 12.2 11.8 25.3 17.1 19.0 12.8 23.6 17.9
Instruments 15.2 13.7 19.0 18.5 14.2 13.9 22.3 16.7
ChemicaIs -----~.
14.2 15.2 27.3 14.1 20.5 10.6 20.3 15.2
Machinery _. _ _ _ _ _ ~ ________ 12.8 13.5 14.6 13.8 10.9 IDA 19.0 14.3
Electric machinery - _.. .. ~---- 12.6 9.0 21.4 16.5 16.0 12.4 18.7 14.0
Tobacco 14.4 15.6 21.0 12.6 15.8 9.6 17.9 1304
Appare! 11.0 19.0 16.8 14.2 12.6 1704 13.0
Fabricated metals _._. ________ 13.6 13.1 17.5 12.3 12.5 9.2 16.0 12.0
Transportation equipment .. _______ 12.9 NA 3504 47.0 26.5 35.3 15.3 11.5
Lumber 20.3 NA 16.4 12.3 15.1 11.3
Textiles ... _ _ _ _ .________ ._. __ 8.9 4.4 1504 5.1 11.6 3.8 14.9 11.2
Rubber and plastics _. 11.7 8.0 11.6 10.6 8.7 7.9 14.6 11.0
Furniture _ _ .... _ _ _ _ .____ ._ _ 13.0 NA 12.3 17.7 9.2 13.3 14.4 10.8
Paper and products ~____ .. _ _ _ 12.5 12.6 1804 9.2 13.8 6.9 13.8 lOA
Leather products ... _ _ _ _ ~__ ._ _ _ 9.3 NA 12.8 17.6 9.6 13.2 13.3 10.0
Food products ___ ._ _ _ ~_____ 12.3 14.4 10.8 13.8 8.1 10.3 13.2 9.9
Petroleum --~._-----~- 11.2 12.5 20.2 5.5 15.2 4.1 12.8 9.6
Primary metals _ _ .. _... _ _ ._ _ _ _ 9.8 8.5 37.0 1.9 27.8 1.4 11.3 8.5
Stone-clay-glass -_ __ ... .. _ - - 10.8 6.8 18.8 1.9 14.1 1.4 10.2 7.7

Source: Calculated from data provided by Fomento and various FTC QuarterIy Financia! Reports for Manufacturing, Mining, and Trade Cor-

-- RubbeT and plastics mainland mte and same as 1975 mainland rate. P.R.
Paper and paper products 1973 rate would be substantially higher ilian mainland
Transportation equipment rate and 1975 P.R. rate would be substantially lower)
Group 2.-Average Puerto Rican aftertax pretit rates higher Tobacco (P.R. ¡average rate lower than mainlan:d rate but
than mainland rates but annual rates lower' in sorne 1973 rate higher tban mainland rate)
years: Paper and paper products (P.R. average rate lower tban
Macbinery (P.R. annual rate lower in 1975) maiuland rate but 1973 rate higher tban mainland mte)
Tobacco (P.R. annual rate lower in 1975) Group 3.-Puerto Rican aftertax profit rates lower than '~,
Fabricated metals (P.R. annual rate lower in 1975) mainland rates in a1l instances;
Petroleum refining products (P.R. annua! rate lower in Fabricated metals
1975) Furniture
Furniture (P.R. annual falte lower in 1973) Food products (probably only for sorne components)
Group 3.-Puerto Rican aftertax protit rate lower than
mainland rate in alI cases: Rates of profit in the stone-clay-glass and pri-
Food products (needs disaggregation; rate far sorne prod- mary metals industries váried widely with aftertax
ucts certain to be higher) comparisons with mainland rates as follows:
Imposition oi 40 Percen! Efjective Tax Rafe 1 Primary Metals
Group l.-Puerto Rican aftertax profit rate higher tban 1973 P.R. profit rates at both 20 percent and 40
mainland Tates in aH instances: percent tax rates much higher than mainland
Printing and publishing profit rates.
Leather products 1975 P.R. profit rates at both 20 percent and 40
Electrical machinery (P.R. rate higher by smal! margin) percent tax rates much lower than the main-
Group 2.-Puerto Rican aftertax profit rates. higher' than land profit rate.
mainland rates in sorne instances and Iower in others: Average P.R. profit rates at 20 percent tax rate
Machinery (P.R. average rate slight1y bigher.•tban main- somewhat higher than mainland profit rates
land rates but P.R. rate in 1973 and 1975 lower lihan and at 40 percent tax rate equal to or lower
mainland rates far those years)
Textiles (P.R. average rate higher tban mainland rates but than mainland rates.
1975 rate lower tbanmainland mte) Stone-Clay-Glass
Printing .and publishing (P.R. average rate higher tban
mainland Tates, but 1975 rate lower '!han mainland mte) 1973 P.R. profitrate at both 20 percent and 40
Instruments (P.R. average Tate slight1y highett" than main- percent tax rates higher than mainland rates.
land rates but 1975 rate slight1y lower I.ban fue main- 1975 P.R. profit rate at both 20 percent and 40
land rate) percent tax rates lower than 1973 mainland
Chemica1s (P.R. average rate sligh!ly higher tban 1973 rate but higher than 1975 mainland rate.
1 USing groupings analyzed in section ITA pages 4.5 to 4.8. Average P.R. profit rate at both 20 percent and

Table 5.-Illustration 01 Effect of Income Taxes on Puerto Rican Income Generation (Based on Labor Income and
Profits in 1977)
Contribution without tax Contribution with tax 10% effective rate Contribution with tax 20% effective rate

Amount Amount Amount

Industry group (mi1lions Industry group (millions Percentage Industry groups (millions Percentage
of dol1ars) oí dollars) increase of dollan) increase
Apparel __.... ____ .__ 190.2 Apparel ._.. _______ .. _. __ 197.6 3.9 Phannaceuticals _ _ .__ _ 263.3 164.9
Food products _.._..._. __ 128.6 Phannaceuticals _..... _ _ _ 181.3 82.4 Apparel .._.. ___ ._ _ _ .__ 205.0 7.8
PhannaceuticaIs ____ .._ 99.4 Food products .... _ _ _ .__ 133.2 5.7 Food producís .. _... _ . _ ... _ 137.8 11.7
Instruments ____ .._~ __ _ 72.8 Electric machinery .... _. _ _ _ 101.3 39.0 Electric machinery _...._... __ _ 129.7 78.1
Electric machinery _ . _ 72.8 Instruments .__ .. _. _ _ ._.. _ 82.0 12.6 Instruments ________ _ 91.2 25.2
Beverages .__ ._..._. _ _ 57.9 Beverages __ .. _____ .____ " 64.1 9.0 Beverages _.. __. _.. __._ _ . 70.4 18.0
Stone-cIay~glass ... _. _ _ _ 50.0 Petrochemicals ..._. _ _ _ _ 56.3 19.5 Petrochemicals _. ____ ._._ 65.6 39.0
Petrochemicals _. ___ ..._ .. 47.1 Machinery _ _ ._____ .. __ 53.9 19.5 Machinery _._. __ .. __ .___ ._ 62.7 39.0
Machinery . ____ .. ___. _ 45.1 Stone·clay-glass _ ...... _..... _ 51.4 2.8 Stone-clay-glass ___ ... __ _ 52.8 5.6
Fabricated metals . 37.0 Fabricated metals ____ ...._ 40.9 10.5 Fabricated metals _ _ ....._ 44.9 21.0
Petroleum refining _........._ 32.3 Petroleum refining __.. __ _ 32.3 Tobacco ____ .. ____ ........ __ _ 33.8 19.8
Printing and publishing _ 31.8 Printing and publishing .. __ 32.3 1.6 Printing and pubUshing .. _._ 32.7 3.2
Tobacco __ ..... ___.. _ _ 28.2 Tobacco __ .... __ .____ . __ 31.0 9.9 Petroleum refining ._ __ 32.3
Rubber and plastics _ .. 27.0 Rubber and plastics _ _ _ 28.7 6.3 Rubber and plastics _.. __._._ 30.! 12.6
Textiles .__ .__ ._.. ____ _ 26.9 Textiles __ .... _ _ .._ .._._. 28.5 5.9 Textiles _..... _. _ _ .____._._ 30.1 11.8
Leather products 24.5 Leather producís _ _ .. __ 25.4 3.7 Leather producís _ _ .. __ .. 26.3 6.4
Wood and fumiture .. _._ 20.9 Wood and fumiture __ .. __ 21.3 1.9 Wood and fumiture ___._ 21.6 3.8
Other chemicals ... _. _ _ . 20.0 Other chemicals __ .. _... __ _ 20.0 Other chemicals __ ... _ _ 20.0
Other petroleum products 12.4 Other petroleum products _ 14.7 18.5 Other petroleum producís __ 17.0 37.0
Primary metals _.... __ .__ 11.9 Paper and paper products _.. _ 12.3 3.4 Paper and paper products ._ 13.0 6.8
Paper and paper products 11.6 Primary metaIs __ ...._ .. _ 11.9 2.6 Primary metals _ _ .___ .__ . 11.9 5.2
Transportation equipment 4.3 Transportation equipment __ 4.4 2.3 Transportation equipment .. _ 4.5 4.6

Source: Calculated from data in worksheets for :income and product accounts provided -bY Puerto Rico Plannine- Board. Amounts with tax: equal
the amount without tax plUS the amount obtained by multiplying total industry profits by the tax. rateo The amount added is thus only an approxi-
mation of the amount of tax. which would have been paid.

40 percent tax rate lower than 1973 mainIand These data al80 make it cIear that increases in
rate but higher than 1975 mainland rate. Puerto Rican tax revenue that might accrue from
The aboye simple analysis suggests that imposi- the application of corporate income taxes vary
tion of a 20 percent corporate income tax would widely from industry to industry. They also indicate
leave Puerto Rican profit rates for almost aH indus- that the largest contributions would be made by
tries higher than profit rates for the same industries capital-intensive indnstries (provided there was snffi-
on the mainland. (This assumes that the relatively cient incentive for them to remain in or come to
10w 1975 Puerto Rican profit rates for chemicals, Pnerto Rico).
machinery, tobacco, fabricated metals, and paper FinaIly, it is pointed out that since the eaIculation
products are not typical.) Profits in sorne food prod- involves the implicit assumption that all profits in
ucts and possibly the furniture industry might, how- 1977 accrued to nonresidents, the amount of the
ever, be lower than mainland rates. Rates in stone- increase in income which would resuIt from taxation
cIay-glass and primary metals have been too erratic is overstated in the case of sorne industries. How-
to suggest concIusions. ever, it is precisely those industries from that taxa-
Only three industry groups would continue to tion would produce the largest increases in income
have aftertax profit rates from Puerto Rican opera- which are known to be practicaIly completely owned
tions which were significantly higher than mainland by nonresidents. (See table 12, chapter ID.)
profit rates. (Profit rates for electrical machinery Influence of Wage Rates.-HourIy wages are dis-
would be only slightly higher than mainland rates.) cussed briefiy at the end of this section. However, a
If 1975 Were to be considered an abnormal year, review of the average annual salary per worker
textiles might be added to that listo highlights the faet that there are wide disparities in
Effect on Income Generation.-Tbe application of wages among industry groups. (See table 6.)
an income tax to manufacturing corporations could
probably have a significant effect on Puerto Rican Table 6.-Average Annual Salary Per Worker 1977
income generated from investment by nonresidents.
Average annual
Table 5 (on p. 45) shows the effects that payment of salary per
corporate income taxes at effective rates of 10 per- Industry group worker
cent and 20 percent on total profits earned in 1977 Petroleum ___ .~~ _____. ______ ._______ ~ $14,318
Transportation ......_...._.. ____._...____ ....._._ _ _ 12,534
would have had on the various"industry contribu- Primary metals 11,872
tions to income if 'aIl indnstries had been owned by Printing .............__ .._..._. _ _ ._.__ .._. ___ ._____..___._ 10,472
Chemicals ..~.._ ...._._. _____ .__._.____ ..___ ...__ ._.~ 10,229
nonresidents. Stone-clay-glass .._............ _________._._ _ 9,958
It appears that the imposition of corporate in- Fabricated metals ..___ ~ __ .. __ .. _______ _ 8,101
Food _. _______._._........__._._.... _ ..._. _______ ._ 7,837
come taxes would not do much to change the order Electrical machinery ..______ ..______ . _____ ._._ 7,317
of importance of industries in terms of contribution Machinery except electrical ._..___ .___. _..._____.... 7,124
Rubber and plastics ____ .. _ _ ~ _________ . __ .... 7,098
to Puerto Rican income. There are considerable dif- Miscellaneous manufacturing __ ... _ _ _ .. _ _ ...._._.. 7,087
Textiles _______ _ _____ .. ________ .__ 6,460
ferences among industries in the amounts and per- Tobacco _. _ _ _ _ _ _ _ _ ._ _ _ ._ _ ._ _ . 6,418
centages of increase as shown below. Paper _. ____________ .._______ ..__ .. 6,210
Fumiture and wood . _ _ _ _ _ _ _ . ____ ..__ 5,901
Instruments . _ _ _____._._ _ ._ _ ...__ _ 5,864
20-Percent Effeotive Income Tax Rate Leather. . . 5,072
Apparel _____ .._.. _____ .. _ _ _ _ _ _ _ _ .: _ _ 4,885
Industries wiili largest amount of increase All industries ....__ .___ .._ ...._ ..._...._ ......_____ _ 7,101
(millions of dollars)
Pharmacel1tkals ____________________________________ . __ ... _... ________ ... . Source: Derived from Puerto Rico Department of Labor, Census 01
163.9 Manulacturing Industries, 1977; Puerto Rico, Planning Board, Income
Electrica1 machinery .... ____ . __ .__ .____ .. _. _________ ._. ___ .......... . 56.9 and Product Accounts (unpublished worksheet data).
Petrochemica1s ........................................................... . 18.5
Instruments ................................................................. . 18.4
Machinery except electricaI .................................... .. 17.6 Total labor income is, however a function of
AppareI ....................................................................... . 14.8 both the volume of employment ~nd wage rates.
Beverages ___ ... __________... ___ ._______________ ._. ____ ... ________ . ______ _ 12.5 Table 7 contains rankings of industry groups by the
Industries wi,th 1Jargest percent morease employment, wage rates, and income. It provides a
(percentages ) basis for sorne judgment as to whether wage rates
Pharmaceuticals ________ or employment levels are more important in deter-
00. _____________________________________________ o
EleotricaI machinery ................................................ .. 78.1
mining an industry's contribution to Puerto Rican
Petrochemicals ............................................. _......... _.. . 39.0 income.
Machinery except electrica1 ........................... _........ . 39.0 Examination of this table snggests that the vol-
Other petroleum products ......................................... . 37.0 ume of employment rather than the wage rate is the
Inl3ltruments ................_............................................ _.. . 25.2 dominant factor in determining the size of an indus-
Fabricated materials ................................................... . 21.0
try's contributioÍl. to Puerto Rican income.

Table 7.-Ranking of Industry Graups by Employment, parent structural shift in theindustrial sector would
Wage Rates, and Labor lncome, 1976 probably involve greater pressure on the other sec-
Employ- Wage Labor
tors to increase their labor-absorption rate as a
ment rate income means of reducing aggregate unemployment. The
Industry group rank rank rank assumption is that Puerto Rico will be able to con-
Apparel . _____... -------~_.-----.. -.----- 1 17 2 tinue to attract these generally high wage indmtries
Food products ----..~._--.-----­ 2 9 1
Electrical machinery --~~ __ 3 7 4 in a volume adequate lo maintain, at the mínimum,
Chemica1s ___________________ _ 4 2 3 total industrial employment relative to total employ-
Instruments --------------- 5 13 5
stone-c1ay-glass ----------------- 6 8 6 ment in the economy.
Leather products ----------------
Fabricated metaIs ------____ _
14 The structural shift in worker i¡¡come distribution
Tobacco __________________________ _ 9 15 11 by industry is further highlighted in table 9 where
Machinery ----------------- 10 6 7 the industry groups are ranked by growth in their
Textiles ____________________ _ 11 14 13
Rubber and plastics -----____ _
Petroleum ___ .___ .. _____________ _
12 11 12 proportional shares of employrnent and compensa-
13 1 8
Printing and publishing _____ _ 14 5 10 tion (1967 to 1976). For example, nine industry
. Wood and furniture ------______ _
paper ________________________ _
15 16 15 groups show a positive increase in their proportion
16 12 17
primary metaIs _. _____________ _ 17 4 16 of employrnent, two remain stable, and nine de-
Transportation equipment _______ _ 18 3 18 creased their re1ative shares of total employment.
Source: Tables 6 and 9 úf chapter III and table 6 of chapter IV. It is difficult to c1arify cause and effect or to fore-
cast long-term planning difficulties which may arise
While aggregate employment is the chief deter- from structural shifts in industrial worker income.
minant in total labor income, the shift toward low The rapid increase in compensation accruing to a
labor-absorbing but high wage industries may be few industries could push Puerto Rico toward future
creating an elite component of the labor force whose economy where sustaining growth in labor income
interests could promote higher wages at the expense (a high percentage of total personal income) was
of driving up wage costs to industries with high rates dependent on a few, primarily capital intensive, in-
of labor employment, but whose cost competitive- dustries. While the analysis is so general at this point
ness is determined by low wage-cost third-country that little else can be conc1uded from this data,
producers. Thus the labor absorption rate of the already the five high growth industry groups, i.e.,
manufacturing sector could be sharply curtailed, chemicals, machinery except electrical, instruments,
even though labor income would continue to rise. electrical machinery, and petroleum, capture almost
The top five contributors to total worker income 40 percent of total industrial compensation. Con-
have increased their share of labor by about 10 per- tinuation of this trend could make Puerto Rican in-
cent between 1967-77. Total compensation growth, come and employment more dependent on a few
as shown in table 8, appears to have accelerated at capital-intensive industries whose location in Puerto
rates faster than employment growth as shown in Rico is in part dependent upon Federal and Puerto
table 7 of chapter III. The significance in the ap- Rican tax exemptions.

Table 8.-Total Compensation Growth by Industry Group 1967-77

[In thousands of dollars]

Salary base Net change Net change Net change Percentage change
Industry group 1967 1967-70 1967-73 - 1967-77 1967-77
Chemicals _..... ____________________________ ~. _____ _ 15,576 15,222 64,639 150,951 961.1
Machinery except electrical __________ . _______________ _ 6,792 1,933 lG,606 38,320 564.2
Instruments __________________. ___________ _ 11,205 10,122 27,811 61,593 549.7
Electrical machinery _0. ____________________________ _ 27,895 17,487 54,636 101,520 363.9
Petroleum _________________________ _ 15,010 9,421 18,317 29,735 148.1
Rubber and miscellaneous plastics ..._______ .. ___ _ 9,662 5,044 11,869 17,362 179.7
Fabricated metals _________________________________ _ 13,521 8,333 19,978 23,497 173.8
Printing _______________________________________ _ 13,619 20,099 171.2
11,739 6,797
Transportation ____________________ "________ ~ 1,652 146 1,863 2,644 160.0
Miscellaneous manufacturing _________________ _ 10,057 6,456 5,692 15,950 158.6
Food ____________________________ __ 88,178 22,293 66,070 125,056 141.8
Apparel ____________________________ _ 87,065 46,363 67,094 103,058 118.4
Paper products _________________________ _ 5,381 2,298 2,981 6,209 115.4
Primary metals ____________________ ~_______ _ 6,065 2,554 4,906 5,801 95.6
Stone-clay-glass ____________ ~______ _ 28,596 10,621 29,018 21,368 74_7
Tobacco ______________________________________ _ 18,664 2,438 4,894 9,522 51.0
Furniture and wood __________________ ~_ 14,537 6,476 11,644 6,310 43.4
Textiles _______________________________ _ 18,931 11,023 14,710 8,016 42.3
Leather products ___________________________________ _ 22,707 6,266 2,116 1,784 7.9
Total industries _______________________ _~~
413,233 186,180 428,611 748,945 181.2

Source: Puerto Rico Planning Board, Income and Products Accounts (unpublished worksheet data)_

Table 9.-Employment arul Compensation Growth hour1y wage rates for each industry group in Puerto
in Proportional Shore of Total Rico. One industry, petroleum, received an average
Employment Compensation hourly wage greater than the U.S. average wage,
($5.19) for manufacturing industries, 1976. (Spe-
1. Machinery except electrical 1. Chemicals
2. Chemicals 2. Machinery except electrical cific industry group comparability with U.S. wages
3. Instruments 3. Instruments is reviewed in the section on competitive industries.)
4. Wood products 1 4. Electrica! machinery
5. Electrical machine:ry 5. Petroleum After petroleum, the chemical, printing, and the non-
6. Petroleum products
6. Transportation electrical machinery industries pay the highest aver-
Fabricated metals
+ 7. Rubber and miscellaneous age industrial wages in Puerto Rico.
9. Food ~6~~/-__·_P_IM_ti_~_ _ _ _ _ ___ Historical increases in average wage rates by in-
10. Paper ~o 8. Fabricated metals dustry, in current dollars, indicate appreciable gains
11. Primary metal 9. Printing
10. Miscellaneolls manuf-acturing (1966 to 1976). Fourteen of the industrial groups
12. Rubber and miscellaneous 11. Food more than doubled their average wage rates. How-
plastics 12. Apparel
13. Apparel 13. Paper products ever, in constant dollars (1954=100), two industry
14. Stone-c1ay-glass 14. Primary metals
15. Miscellaneous manu- 15. Stone-clay-glass groups, transportatiou and leather, had zero growth.
facturing 16. Tobacco Petroleum again exhibited the highest growth rate
16. Textiles 17. Fumiture and wood 1
17. Tobacco 18. Textiles but only a 33-percent increase for 1970-76.
18. Fumiture 1 19. Leather Minimum wage requirements have been a factor
19. Leather
20. Transportation in the increase in Puerto Rican wages (see chapter
X). They may be even more important under re-
1 Wood and furniture comparison in compensations estimates.
cently (1977) enacted Federal legislation.
In 1976, six industries paid less than the manda-
The comparability of Puerto Rican and mainland tory minimum wage of $2.65 which went into effect
industry group wage rates is examined in chapter V. in January of 1978; lumber at 95.8 percent of the
That examination reveals that wage rates have been minimum wage, furniture (92.4 percent), tobacco
increasing faster than mainland rates but that be- (90.9 percent), textiles (89.1 percent), apparel
cause of the larger base for mainland rates, the (88.3 percent), and leather (82.2 percent). Specific
spread between rates has increased somewhat. proportions of each industry group employment
Table 10 presents a ranked listing of average which paid less than $2.65 are not available. How-

Table 10.-Hourly Wage lndustry Groups 1966-77

[In thousands of current dOllars]

1976 1976 distribu-
percentage percentage tion of
of 1976 of locally
minimum percentage minimum owned Labor ~
wages of total wages industries income to
1/1178 employ- 1981 (EDA tax total costs 11
SIC industry group 1966 1970 1973 1976 $2.65 mení $3.35 sample) 1977
Pe1roleum --------------------~---------~--------
2.76 320 4.32 6.01 226.8 2.0 179.4 O 1.8
Chemicals -~--------------------------
1.64 2.26 2.87 3.90 147.2 8.6 116.4 16 11.8 11
Printing -------------------------------------
Machinery except electricaI --------------------
Fabrication metals --------------------
Primary metals _________________________________ 1.61 2_04 2.50 3.17 119.6 .7 94.6 5 20.9 ~
Stone-clay-glass -------------------------- 1.69 2.12 2.63 3.15 118.9 3.7 94.0 30 21.8
Transportation equipment ----------------- 1.55 2.22 2.63 3.13 118.1 .2 93.4 2 30.3
Paper ------------------------------------------ 1.62 2_05 2.49 3.07 115.8 1.0 91.6 2 18.9
Instruments ----------------------------------- 1.45 1.92 2.32 3.05 115.1 7.3 91.0 12 28.4
Electrical machinery ------------------------ 1.47 1.95 2.24 3.05 115.1 9.2 91.0 12 19.0
Food ------------------------------------------ 1.40 1.82 2.23 2.86 107.9 16.7 85.4 34 14.0
Miscellaneous industries ----------------------- 1.17 1.66 2.07 2.78 104.9 2.1 83.0 8 28.4
Rubber and plastics _____________________________ 1.23 1.73 2.09 2.75 103.8 2.4 82.1 17 26.2
Lumber ------------------------------- 1.17 1.62 1.91 2.54 95.8 .9 75.8
Fumiture _______________________________ 2.00 2.45 92.4 3i! 27.4
1.24 1.73 1.6 73.1
Tobacco _________________________ 1.05 1.49 1.81 2.41 90.9 3.1 71.9 1 17.0
Textiles -------------------------- 1.23 1.61 1.94 2.36 89.1 3.0 70.4 7 16.9
AppareI ---------------------------- 1.18 1.60 1.83 2.34 88.3 25.6 69.9 64 35.8
Leather -------------------------- 1.08 1.55 1.69 2.18 82.2 3.4 60_1 5 29.0
Al1 industries _____________________ 1.31 1.78 2.17 2.86 107.9 100.0 288

Source: Puerto Rico Department of Labor, C-ensus 01 Mcmulacturing Industries (various years)


ever the information presented indicates that 38 INTEGRATED ANALYSIS AND

perc~nt of the total industrial employment was in CONCLUSIONS
industries with average rates be10w the J anuary 1978
minimum. The preceding analysis demonstrates that (a)
The impact will be considerably greater by 1981 there are wide variations in the benefits provided
when the minimum wage level rises to $3.35 an Puerto Rico by various industries; (b) provision of
hour. As may be seen from table 10, only these in- such benefits is conditioned and constrained by a
dustry groups: petroleum, chemicals, printing and number of factors; and (c) there are variations in
pnblishing, and machinery had average wage rates the degree of risk or vulnerability to Puerto Rico
higher than $3.35. While sorne increase in wages involved in different directions or emphases in the
from 1970 to 1981 would be expected, it is c1ear development of the internal composition or struc-
that a large proportion of industries and the manu- ture of the manufacturing sector. Variations arise
facturing labor force will be affected. from such factors as source of investrnent (i.e., by
Firms most likely to receive the greatest negative residents or nonresidents), the characteristics of in-
impact from minimum wage increase are those where dividual industries, profit levels, comparative rates of
labor costs are a high proportion of total costs. profits as between the island and the mainland,
Table 10 also presents 1977 labor costs as a propor- market and demand conditions, and the nature of
tion of total costs? Four industries with average investment incentives utilized.
wage rates below minimum wage (1976)-apparel, The following conc1usions also emerge from that
rubber and plastics, wood and furniture, and leather analysis:
-have a high proportion of total costs associated
with labor income. Printing and publishing is the The industries now making the largest contribu-
only industry with a high proportion of lagor cost tions to Puerto Rican income resulting from employ-
which, in 1976, had an average wage rate higher ment, high wages, or the number of plants located
than the 1981 minimum. on the island are:
A current (1973 or 1977) breakdown of local Apparel
and foreign industry groups was not available for Electrical machinery
this analysis. However, a general feeling for low Pharmaceuticals
wage impact on local firms can be achieved by using Professional and scientific instruments
1975 Economic Development Administration (EDA) Food products
tax-sample data to compare local/nonlocal indus-
trial structure with high wage differentials. Forty In order to be productive of a high absolute level
percent of the locally owned firms across industry of income to Puerto Rico, very highly capital-inten-
groups have an hourIy wage (1973) less than the sive industries should:
minimum set for J anuary 1978. Only 20 percent of
locally owned industries exist in the five highest pay- 1. Rave substantial linkage to other island
ing industries. The relatively high percentage of local industries,
firms associated with lower average wage industries 2. pay high wages,
suggests that locally owned firms wi!l receive a 3. have a large number of plants, or
greater impact from minimum wage legislation. 4. provide substantial tax revenues.
A brief analysis of the number of workers per Industries making the largest contribution to
indnstry indicates that no size bias is associated with Puerto Rican income are, of course, very important
high wage rates or with industries below minimum to Puerto Rico's development. Rowever, policy
wage. The range of average workers per unit in the toward them and the extent of their contribution may
highest and lowest industries is from 147 to 16, and vary by industry group, source of investment, and
130 to 8, respectively. At this level of analysis, it other factors.
does not statistically appear that mínimum wage in- A surnmary which ranks industry group contribu-
creases will discriminate against smaller firms. How- tion to income and shows the way in which other
ever, there are indications that these "averaging" factors may condition the relative importance of the
calculations may distort the picture. An increase in various industries is contained in table 11.
minimum wage rates for the small firms tends to
force wages up across the board as workers negotiate
for the same relative salary differentials that existed IMPLICATIONS FOR
before minimum wage increases. GOVERNMENTAL POLICY
2 Total costs were estimated using total sales minus net earnings
(profits) calculated from 1977 worksheet estimations. Puerto Rico The analysis provided in the previous pages ~s
Planning Board, lncome and Product Accounts (unpublished work-
sheet data). based on fragrnentary and noncomparable data. It IS

Table ll.-Ranking o{ Industry Groups by 1977 Contributions to ILabor blCome and Summary o{ Factors
Conditioning Their Relative lmportance to Puerto Rican Development

Puerto Rico profit

Industry groups ranked by rate cornpared with
contribution to Puerto rucan Labor capital Puerto rucan mainland rate Sensitivity to
income in 1977 intensity profit rate (after tax) Market potential increased wages
Appare} __________ ._. _____________________._______ High labor High Well aboye Good High
Electrical machinery ______________.____."______ High capital High Well aboYe High Sorne
Food products ___________.________________ Medium to high labor Low medium Above Varied Med. varies by prod.
Pharmaceuticals __._______________ Very high capital High Above-well aboYe High Very 10w
Instruments _______ ".__________________ Low capital Very high Well aboYe Varied Mediurn
8tone-claYwglass _____ ._____"___________ l-Fí!:h labor Low Above Limited by local market Medium
Petrochemicals ______________________ High capital Low Low High Very low
PetroJeum reflning _____________________ High capital Low Low High Very low
Machinery ...______________________________ High capital High Above-well aboYe Good, lirnited by local rnarket Low
Fabricated metaIs ____________________ Labor Low~high Well aboye Good, limited by local rnarket Low
Printing and publishing _______________________________ .__ Wgh labor H1gh~high Well above Good, lirnited by local market Low
Tobacco products ___________________ Labor High Above-well above Lirnited High
Ruhber and plastics _______________________ Labor Medium Above Good Mediurn
Textile milI products ________________ Labor Medium Well above Limited High
Sugar _._. __.. __ ,.. ______________________ Labor Low Low
Leather products _________________ High labor Low-medium Above Good Very high
Soft drinks ___ .___________________________ Cap;tal Good, limited by local market High
Wood and fumiture _________________ High labor High~mediurn Limited by local market High
Other chemicals _________________________ Labor
AlcohoJic beverages ____________________ Low capital Good
Beer _______________________________________ Labor Good, limited by local market
Primary metaIs _.___________ Labor Low Low Varies by project Low '"
Paper and paper products _____________ Labor Medium Good, limited by local market Medium "
Ut Transportation equipment _________ Labor High~medium Well aboYe Limited by local market Medium
Vulnerable to tax changes
Potential for
tax revenues Sensitivity to trade policy Dependence on incentives 20-percent rate 1 40-percent rate 1
Apparel ___._______ . __.__________________ ___ _
Sorne yes Special incentive tax exernption No Possibly yes
Electrical machinery . _________ ~ _________ High To sorne degree Tax exemption No Probably yes
Food products _" __________________ _ Some To sorne degree Special incentive tax exernption Ves for some producís Ves for sorne products.
PharmaceuticaIs _____________________ _ Very high No Tax exemptipn No Probably yes
Instruments ___________ ________________ _
Mediurn To sorne degree Tax exemption No Probably yes
Stone~cIay-glass ___ _______________
UttIe No Special incentive tax exemption Possibly yes ProbabIy yes
Petrochemicals _______________________ _ LittIe Previous entirely dependent Tax exemption, special pricing Probably yes Probably yes
on special U.S. policy
Petroleurn refining ______________ Little Previous entirely dependent Tax exemption, special pricing Probably yes y.s
on special U .S. policy
Machinery ______________________ Medium high No Tax exemption Probably no Probably yes
Fabricated metaIs ____.______________ _ Mediurn No Tax exemption Possibly no y.s
Printing and publishing _________ ." ______________ . Little No Tax exemption No Probably no
Tobacco producís _. _________________ _ Mediurn No Special incentive Probably no yes
Rubber and plastics __________________ Sorne No Special incentive tax exemptioD No Possibly yes
Textile milI products ______________ ~ ___ _ Sorne y" Special incentive tax exemption Possibly yes Possibly yes
Sugar _. ___________________________________ None yes
Leather products ______________________ Little y" Special incentive tax exemption No Possibly no
Soft drinks _______ ". ___________________ _ No Tax exemption
Wood and fumiture ____________________ _ Little No Special incentive tax exemption Possibly yes yes
Other chemicals ___ .________________ No Tax exernption
Alcoholic. beverages ,_______________ _ Possibly Tax exernption
Beer _________.________________________ _ Little No Tax exemption Probably no
Primary metals ___________________'________ Little No Tax exernption Possibly yes Probably yes
Paper and paper products _____________ _ Little No Special incentive tax exemption Possibly yes y.s
Transportation equipment ___________ _ Little No Tax exemption No No

1 Puerto Rican corporate profit tax rates used for analysis. Source: Derived frorn ana1ysis.

-,-"-"--' O"~"~"~
also incomplete and leaves out many factors which that high wage rates may be making tax exemption an ,1:'
: I
must be taken into account in formulating govern- increasingly predominant fact in decisions as to loca-
tion in Puerto Rico. Finally, it suggests tbat ful! appli-
mental policy toward and programs affecting tbe
manufacturing sector. The analysis is, in many cases, cation of Federal minimum wage standards to Puerto ! :

WO aggregated and needs to be carried to 3- and, Rico may have significant adverse affects in industries
perhaps in some cases, 4-digit codes for sorne indus- which historically have made and are now making
tries. As a result, it eannot serve as a basis for final significant contributions to Puerto Rican income; and
poliey and program formulation. It may, however, it is likely to reimoree a tendency toward substitution
have significance foor government policy in a number of nonresident capital for loéal labor.
of ways. First, it points to specific queruons concern-
ing current and prospective policy which should be Options for Consideration
examined. Second, it indicates that there are certain
options as to sector policy and taxall:ion and incentive The fact that analysis disdoses tball: there are wide
programs which should be further explored. Third, variations among industries in terms of tbeir benefits
11 is snggestive of the kind oí analysis which should to Puerto Rico and of the conditions which make
be made, using more adequate data and methodology, possible or constrain their ability to produce such
to provide a basis for policy and program foormulation. benefits suggests that, in addition to tbe option of
continuation of the present policy of making little
Questions for Examination di&tinction among industries in incentive programs
offered, it might be desirable to consider an alterna-
Qnestions of current and prospective policy to- tive under which governmental emphases and pro-
ward the manufacturing seotor which the analysis grams are differentiated by c1asses oí industries in
suggests may need consideration related to: ,- accordance witb their relative contributions to Puerto
1. The desirability of dependeuce upon external Rican development.
investment for development of tbe sector and the Adoption of snch an option would require an
practicality of development of a more indigenous incentives system which differentiates among indus-
sector based on more local capital accumulation and tries. For example, direct subsidies or elongation of
investment. the tax exemption (subsidy) period might be useful
2. The implications of a policy emphasizing indus- in attracting certain types of industries to tbe island.
tries having substantial external investment require- The elongation of the exemption period is already
ments, low labor absorption, low interindustry link- used on tbe island to locate industries in various
ages, etc., subject to adverse external aotions by island geographic zones. Also, it might be found thall:
corporate and/or public policies unrelated to eco- industries with relatively low required risk premiums
nomic conditions ou tbe island. may be induced to tbe island with a lower exemption.
3. The possible effects of rising wage rates and the On the other hand, industries with relatively high
ful! application of Federal minimum wage standards required risk premiums would have to have complete
to Puerto Rico on the competitive position of partic- exemption plus direct subsidies to be attracted to the
ular industries and tbe nature of industries operating island. The purpose would be to maximize tbe iru:ome
in Puerto Rico. and revenue base available to Puerto Ricans, not to
The analysis indicates tbat, in principIe, there is discourage industries from locating on tbe island.
desirability, in teorms of increasing direct benefits to
Puerto Rico and of increasing stability and reducing Research, Analysis, and Data Needs
risks from changes in external circumstances, for
increasing Puerto Rican investment in manufactnring. The analysis undertaken in this study has suffered
The scope oí this study, however, does not perrnit from the lack of appropriate and verifiable data,
an examination of such tbings as tbe feasibility of making conc1usive responses to issues nearly im-
increasing local capital accumulation, the need for possible.
supporting systems outside tbe sector (e.g., systems Sectoral produotivity measures were seriously de-
of distribution and marketing, nonmanufacturing tax ficient, because capital utilization rates, standard
systems, financing mechauisms and policies and prac- hourIy work weeks, and even hourly wage rates were
tices, government inve&tment priorities, etc.) which diflicult to obtain and verify. Industrial investment
would be necessary to reach concJusions as to tbe data is nonexistent or weak, as is final sales and
practicability of adoption of government programs capital consumption data. Undocumented worker
for increasing such investment. data was nN available, particularly in industries
The examination of wage rates suggests tbat in- where piecework or household production can be
creasing wage rates could present serious problems undertaken. Also, sectoral wage and salary data could
for most indu&tries in Puerto Rico. It also indicates be improved for tbe industrial sector as a whole.

Output per man-hour data is essentialiy weak, as are not taken into account in investment data used should
unit labor cost estimates. Implicit price deflators for be brought into the analysis. Examples inc1ude such
the sector are weak, particularly where the import things as the necessity for provision of economic
content of production is substantial. infrastruoture, costs or environmental degradation
Another area of concern is the measurement of which may vary greatly from industry to indnstry,
income f10ws to nonresidents as a means of evaluating and costs of any promotion programs. There would
investmerut decisions. Research activíties in the sector also be a need to take market prospects into accoUIJJt.
are hampered by the lack ofappropriate and timely Obviously, there would be little point in trying to
data. stimulate an industry whose characteristics are such
The Commonwealth should UlJJdertake efforts to as to make it, in principIe, highly desirable for Puerto
UlJJify data collection activities to improve the an- Rico but whose competitive status with other pro-
alytical base for policy guidance. Adequate financial ducers is questionable. AccoUIJJt would also have to
support for these aativities appear to be an area of be taken of the ability of the irudustry to produce tax
shortfall. revenues. The possibility of Puerto Rican income
In the area of analysis, consideration should be laxes and the return of Federal excise taxes are cases
given to a more elaborate comparison of relative in point. Table 11 illustrates the factors to which con- ,
rates of profits among industries and between Puerto sideration would be given. Finally, accoUlJJt would [
Rico and mainland industries, which was attempted in have to be taken of any substantial differences among ¡,
a prelimiruary manner aboye. In addition, any varia- industries in their indirect income and employment
tions from industry to industry in costs lo Puerto Rico generation effects. ¡

Chapter V.-Competitiveness of Puerto Rican
INTRODUCTION assumptions which underlie the analysis are out-
lmed below.
In the previous chapters, an effort was made to First, the primary market area evaluated in this
cJarify and evaluate industry group contribution to analysis is the U.S. mainland. This market orienta-
overall economic development in Puerto Rico. The tion is emphasized because the preponderance of
"comparative analysis" of industries onisland must Puerto Rican trade is linked to the mamland. The
be complemented by an evaluation of the competi- U.S. market emphasis is important when evaluatmg
tive position of island industries with the U.S. mam- the competitiveness and specific factor costs on
land and intemational markets. The purpose of Puerto Rico. For example, Puerto Rican wages may
such an analysis is to cJarify some of th¿ major not be competitive with Latin American countries,
locational factors considered by mdustries mter- but highly competitive with U.S. wages. Other things
ested m moving to Puerto Rico. The results will also bemg equal, to suggest that an industry is not viable
assist in evaluating market competitiveness associ- for Puerto Rico because wage scales are lower in
ated with commodities produced by Puerto Rico. other Latin American countries often misses the
The followmg chapter focuses on the answers to point that such industries are viable in the United
a series of questions frequently asked with relation States at much higher wage scales. (Notwithstanding,
to industrial viability or competitiveness m Puerto Puerto Rican products must be price and quality
Rico. competitive with products in the world market.)
• Are Puerto Rican industries m general, or m- Second, it is assumed that, in general, industries
dustry groups in particular, becoming less com- locate mareas where total factor costs are mini-
petitive because of increased labor costs on the mized, assummg demand factors permit adequate
island? aftertax profits. While such an assnmption simpli-
• Is the productivity of Puerto Rican labor in- fies the analysis, often a mix of "satisfactory" rather
creasmg or decreasing? In general, are Puerto than "optimal" requisites infiuence corporate loca-
Rican workers competitive with U.S. mamland tion decisionmakmg. U.S. corporations operatmg m
employees m terms of productivity? foreign areas must consider many mtangible fac-
tors which provide satisfactory, rather than optimal
• Are Puerto Rican industries more or less pro- solutions to locational problems. Many of these
fitable than similar mdustries on the mainland? intangibles are also associated with industrial loca-
Isthis profitability difference increasmg or tion m Puerto Rico. However, m many instances,
decreasmg? factors which inhibit industries from locatmg m
Puerto Rico act to prohibit mdustries from locatmg
'. Are power (energy) cost differentials increasing
or decreasmg between Puerto Rico and the in other Latin American countries. Such factors
mainland? incJude security-safety, political stability, labor skill
and entrepreneurial ability, language, educational-
The competitiveness of Puerto Rican industries literacy levels, innovative capabilities, busmess en-
in the international busmess environment is a par- vironment, financial-mstitutional support, infrastruc-
ticularly important factor in the formulation of the tural requirements, regulations and controls, trans-
island's development policy. Too often, however, portation-communication stability, educational-rec-
Puerto Rico's competitiveness is viewed or charac- reational-commercial environment for U.S. adminis-
terized by a single variable such as labor costs. trators and families, economies of agglomeration,
Given the potential for drawmg biased concIu- weather-cIimate, insect-pest-disease control, general
sions from a simplilied factor set, severaI analytical environmental quality, social-cultural differences,

and public acceptance. None of these factors, and crease in the Caribbean, Puerto Rico serves to link
this is not an exhaustive list, are evaluated in this the relatively highly developed economy of the
chapter. United States to developing economies of the Carib-
Third, prodnct competitiveness in the world mar- bean regíon. Puerto Rico ofiers a pool of skilled
ke! cannot be realistica1ly evaluated through an workers and managers with a bilingual ability to
analysis of factor cos!. Statistics on production cos! convey ideas, innovations, technology, trade and
factors, such as land, labor, capital, and power are marketing expertise from English- to Spanish-speak-
presentIy difficult to compare. ing regions.
F ourth, two additional factors which influence !he
competitive position of Puerto Rican industries are Resource Base
trade and tariff regulations/ agreements, and tax One of the more difficult obstacles to overcome
policies. The major impacts of trade and tariff with respect to the industrialization of Puerto Rico
agreements are discussed in chapter IX "U.S. For- is the lack of natural resources. At present, Puerto
eign Trade Policy in Puerto Rican Industry." The Rico has only a small mineral, and no carbon
influence and utilization of tax incentives to increase (energy), wood or fiber resource base. The lack of
the industrial profitability (competitiveness) in Puer- natural resources inhibits the growth of a localized
to Rico, are discussed in chapter VI "Industrial industry which could take advantage of the in,.
Incentives," and a brief comparison of tax incen- creased value added associated with the processing
tives ofiered in regional countries and selected of primary inputs.
States are inc1uded in chapter XI, "Administrative
The fust section of this chapter briefly reviews Relative Factor Supply
the economic and political factors which in general A review of additional factors which facilitate
influence the competitiveness of Puerto Rican in- the development of industry in Puerto Rico reveals
dustries. The second section focuses specífically constraints similar to !he scarcity of natural re-
on the competitive cost factors referenced earlier: sources. Puerto Rico is limited by the availability
Wage rates, productivity, profitability, and energy of local capital, the availability of land, particularly
cost difierentials. in the larger northern metropolitan areas, the lack
of a local technical scíentific stmcture from which
to draw innovation and technology, and to sorne ex-
GENERAL CONDITIONS WmCH tent a mature, highly skilled labor force.
COMPETITIVE POSITION IN The Federal Relationship
Puerto Rico has shared an extended economic
The competitive position of industries located in relationship with the U.S. mainland. The open econ-
Puerto Rico is influenced by the island's insularity, omy and free migration of workers have historically
cultural history, and unique political-economic asso- provided a safety valve for !he unemployment and
cíation with the United States. overcrowded underdeveloped conditions existing in
Puerto Rico. In many respects, Puerto Rico has also
benefited from the economic and political associa-
Insularity tion with fue United States in that it has the oppor-
Puerto Rico's insularity, the barrier of ocean tunity to participate in federally sponsored assistance
distances between the U.S. mainland and Puerto and welfare programs.
Rico, and its geographic location relative to Central On the other hand, Puerto Rico cannot control
and Latin American conntries act in both a posi- its own monetary policy, its own tariffs or tariff
tive and negative fashion to influence industrial agreements, its minimum wage rates, or other policy
growth. With respect to the U.S. mainland market, tools often utilized to protect infant industries.
fue distances, the cost of transportation, the diffi- Puerto Rico is also constrained by U.S. regulations ,l'
culties in communication, and the lack of person- which control access to the island, transportation e
to-person contact constrain operations in Puerto rates, environmental and safety requi~ements, energy !
Rico. use, and conservation incentives, etc.
On the other hand, the regional location and the Most of the general conditions listed aboye, which
long association with the U.S. mainland provide afiect Puerto Rico's competitive position, cannot be
Puerto Rico with the resource and skill base to act qualified and compared with the business or indus-
as a link or bridge economy in the development ol trial environment found on the U.S. mainland. There
the Caribbean region. As U.S. Federal interests in- is, however, sorne degree of data comparabílity

among four major economic factors which can be Therefore, comparing Puerto Rico with the 28
used to determine selected aspects of the competi- countries listed reflects a favorable competitive wage
tiveness of Puerto Rican industries. The following position.
section ranks each of the industries against the set It should also be noted tha! lhe definitiou of the
of competitive factors. The four major competitive terros "earnings," and "hourly compens'ation" changes
factors considered are: (1) labor cost, (2) produc- from country to country, allowing only a very gen-
tivity, (3) profitability, and (4) fuel and power eral ilJJterpretation of the tabnlar material.
costs. Second, the specific figures quoted often represent
averages and should be considered only as a relative
LABOR COSTS indication of the countries' ranking.
Third, ofien the estimated hourly compensation
Wage Rates figures vary within an individual country. For ex-
In discussions concerning the competitive posi- ample, the Puerto Rican figures rauge froro $2.86
tion of Puerto Rican industries, the factor most ofien per hour to $3.13 per hour, depending on the llOurce.
referred to as the indicator of Puerto Rico's poor The Puerto Rican wage ra!es utilized in the com-
competitive position is the relative1y high wage rateo parisons were taken from the Puerto Rican Depart-
Puerto Rican minimum wage ($2.65/hr, January ment of Labor Statistics.'
1978) is often contrasted with wage rates in the Puerto Rico ranks 17th out of 28 countries in
Caribbean and Central American countries. The hourly compensation for production workers in man-
implication is that "Iabor-intensive" industries will ufacturing. The imposition of mirumum wage on
expand to cheaper labor areas and not to Puerto January 1, 1978, did not change Puerto Rico's rela-
Rico, and that labor-intensive industries now located ¡(ive position. Another important economic factor
in Puerto Rico may eventually leave. highlighted by the table is that those countries which
are most competitive in lealher and leather products,
The drawing power of low cost labor becomes an
apparel, textiles, and other labor-intensive industries,
important policy consideration because Puerto Rico
have much lower wage rates than those of Puerto
has used lower wage rates to attract U.S. industries
Rico. This is particularly troe of Taiwan, Korea,
to the island.
Singapore, and Hong Kong, who directly compete
In general, Puerto Rican wage mtes remain com- with Puerto Rico in the textile and apparel indus-
petitive with those in the United States and many tries, and with Taiwan and the Philippines in the
developed countries, lhough increasing wage trends lealher and leather products industries, specifica1ly
on the island are dampening this advantage. Table 1 shoes.
presents the estimated hourly compensation of pro- Table 2 shows a mOTe specific range of hourly
duction workers in manufacturing for 28 countries in compensation with respect fo 13 countries and 5
1976. The 28 countries were selected on lhe basis of specific industry groups. The Puerto Rican wage
data availability. They do not represent an ulJJbiased rates are folIowed by parentheses ( ) which identify
distribution. The countries listed were drawn from a lhe re1aJtive rank of lhe Puerto Rican wages.
sample of 66 nations. Wilh ,lhe exception of Sri Lanka F or lhese specific countries, the Puerto Rican
and the Philippines, all 28 countries have a GNP per wages remain highly competitive. Even in lhe textile,
capita greater than Korea ($560/yr.). apparel, and lealher industries, an increase to $2.65
minimum wage in J anuary 1978 would do little to
Table J.-Estimated Hourly Compensation of Produc· change Puerto Rico's position. In texrtiles, PueNo
tz"on Workers in Manufacturing~' 28 Countries, 1976
Rico would move to seventh rather than eighth place;
[In U.S. doIlars] in apparel it would remain lhe same; in leather and
1. Sweden __ ._____ .... _____ 8.27 16. United Kingdom __ .. ____ 3.11 leather produots, it would rise to eighlh, ralher lhan
2. Norway _ .. _______________ 7.66 17. Puerto Rico ______________ 2.86 ninlh place.
3. Canada _______ .___.. ______ 7.32 U.S. minimum wage 1 _ _ _ 2.65
4. Belgium _.. _..__ .....__ .. _. ____ 7.09 18. Ireland _. _______________ 2.63 As in table 1, no specific definition of industrial
5. United States ___ ., __________ 6.84 19. Israel _____________ .__________ 2.18
6. Netherlands __ ... ______ .__ .___ 6.74 20. Greece ______________ 1.55 competitiveness can be isolated from the table. Hong
7. Denmark __ ._..... _______ 6.71 21. Portugal ____ .. ____ --' ____.____ 1.55 Kong, Japan, Korea, Taiwan, and Spain, for the
8. Germany ___ .__ .__________ 6.62 22. Hong Kong ___ ._________ _85
9. Switzerland ___..._.... ____ 6.42 23. Singapore ______ (1975) .77 most part, remain in a better coropetitive position
Australia __ ._... _. ________
Finland _________________
24. Turkey .____ ~_. __ (1975)
25. Taiwan _________________
than Puevto Rico with respect to apparel, textiles,
12. Austria _____ ._____ ~ ___ 4.68 26. Korea ___________________ .52 and 1eather industries. In electronics, only J apan
13. France __________________ 4.65 27. Philippines _________ .28
14. Ita1y __ ._ _ .___._____ . ___ 4.23 28. Sri Lanka __ .. __ .. _____.___ .23
and the United Kingdom have wage rates lower lhan
15. Japan ___.. ____ .. __ ..__ .. 3.29 Puerto Rico, and only lhe United Kingdom carries a
wage rMe lower lhan Puerto Rico in chemicals. While
1 Minimum wage January 1978.
Source: U.S. Department of Labor, Bureau of Labor Statistics, 1 Census oj Manufacturing Industries, Puerto Rican Department of
Office of Productivity and Technology, June 1977, Unpublished Data. Labor, San Juan, various years, 1967-76.

Table 2.-Estimated Hourly Compensation of Production Workers for Selected Industries~ 1976-1J Countries

Country Textiles Apparel Leather Electronics Chemicals

Puerto Rico __ .. ______________ .. _________ .. _________ .____ ._ 1 $2.59 (8) 1 $2.57(7) 1 $2.40(9) $3.35(7) $4.28(8)
United States __ .____________________________ ._______ 4.53 4.13 4.25 6.50 7.78
Canada _____________ .________ ._______________ 5.30 4.62 24.55 7.73
Hong Kong ______ .___ ._________________ .______ .90 .80
Japan _____________ .____________.________ 2.34 1.68 2.63 3.02 4.64
Korea ______________________ ._____ ._________ .55 040 .50
Taiwan _____________________ .____ .. _._. _______ ._.. .50 .49 049
Franee ________________________ .. _____ .________ 3.80 3.33 23.58 4_39 5.50
Germany __________ .___________ .__ .-=------_______..__ 5.50 4.94 24.79 6.24 7.62
Italy ___________________ .. ________________ 3.51 2.75 23.19 4.57 5.03
Spain __________________.________________
Sweden ___ ... ________ .. ___._._____ .. _______________
United Kingdom ___ . ___ ._______________________
1 Below minimum wage established January 1978, $2.65.
2 Wage information onIy available for leather furniture.

O Indicates rank of Puerto Rico among 13 countries.

Source: U.S. Department of Labor, Bureau of Labor Statistics, Office of Productivity and Technology, 1976, Unpublished Data.
Ltaly, Spain, Taiwan, and Korea remain competitive terms oí proximity to the United States, and in terms
with Puerto Rico, the wage dispersion among these of product and market location competitiveness,
countries is much greater than the wage differences i1Iustnute the dilemma facing Puerto Rico with re-
between the United Sta tes and Puerto Rico. spect to wage rates and other factors oí production.
Por manufacturing in general, and for each oí the
Table 3.-Estimated Average Hourly Earnings Per Pro- labor-intensive industries profiled, Puerto Rico stands
duction Worker for Manufacturing, Selected Indus- as much as four times greater in salaries and wages
tries 1976, 12 Latin American Countries
paid to workers. In terms of specific industry groups
Manu- identified, -textiles, apparel, and leather, the impact
Country facturing Textiles Apparel Leather of a $2.65 minimum wage will increase the wage
Puerto Rico ----.. _---_._---- $2.86 1 $2.59 1 $2.57 1 $2.40 differential between the two countries. When Puerto
Argentina _.._---------- .66 .58 .66 .65
Brazil -----_._-------------- .72 .50 Al .51 Rico is compared with these 12 Latin American
Colombia _._------- 046 046 .29 .36 countries, and wage rates are the determining factor
Costa Rica _._------------
, 040 , .56
for industriallocation or pricing of commodities, the
Dominican Republic -----
, .76 , 043
El Salvador --------------
Guatemala ----~------------
.52 , .46
.46 , Al , 043
generalization that Puerto Rico is not competitive, at
Mexico --------------- 1.43 21.10 least in the manufacturing sector as a whole, and in
Nicaragua --------------
Panama -_._----------
21.09 , .82
, .47
.91 textiles, apparel, and leather, as separate industry
Venezuela ---_.._------._- 1.92 1.63 1.63 groups, holds true. However, if the United States con-
Honduras --------_.-------- .55
tinues to be identified as the primary market for
11975 data. Puerto Rican goods and U.S. industries remain the
2 1974 data.
primary competitor for Puevto Rican industries, then
Source: U.S. Department of Labor, Bureau of Labor Statistics,
Office of PrOduetivity and TechnOlOgy, August 1975, Unpublished Data. table 3 bears little relationship to the potential via-
bility of induO'ltries in Puerto Rico with respect to
Table 3 narrows the intern~tional arena to 12 U.S. markets.
Latin American countries, and presents the wage Table 4 presents the average hourly earnings for
differel]tial between three specific sectors and the manufacturing industries in the United States and
manufacturing industry total. These countries, in Puerto Rico. This particular table shows a time series

Table 4.-Average Hourly Earnings for Manufacturing Industries, United States and Puerto Rico

U.S. Puerto Rico!

Puerto Rico minimum wage Minimum wage U.S.
U.S. average Puerto Rico hourly U.S. U.S. hourly hourIy wage
minimum hour1y earning average earnins differential
Year wage earnings differential hourIy wage differential (percentage)

1950 -------------------- $0.75 $0.42 $0.33 $1.50 $-0.75 28

1955 ------------------- 1.00 .56 044 1.91 -.91 28
1960 -------------- 1.00 .94 .06 2.30 -1.30 41
1965 -----_.------_.- 1.25 1.26 .01 2.64 -1.39 48
1970 ------------------ 1.60 1.78 -.18 3.37 -1.77 53
1975 --------------- 2.10 2.59 -.49 4.40 -2.30 53
1976 -~-----_ .. _ - - - 2.30 2.86 -.56 5.28 ~2.98 54
1977 ---_.------------- 2.30 3.11 -.81 5.60 -3.30 56

Source: U.S. Department of Labor, Bureau of Labor Statistics, Employment and Earnings and Commonwealth of Puerto Rico, Bureau
of Labor Statistics.

of growili comparisons between U.S. minimum wage, The re1ative rate, however, has changed signifi-
V.S. average hourly wage, and Puerto Rican average cantly as the wage base increased over the 27 years.
hourly wage. The table highlights some iruteresting In 1950, Puerto Rican wages represented 28 percent
comparisons. First, Puerto Rican wage rates are of ilie U.S. hourly wage. By 1977, Puento Rican
much lower ilian wages in the United States. In one wages were 56 percent of the U.S. wage. If wage
respect, the difference appears to be increasing. In differential is an important factor affecting locational
1950, for example, the absolute wage difference was decisionmaking, the relative impact of a lower Puerto
$1.08. By 1977, the absolute difference was $2.49. Rican wage carries less weight in 1977 ilian it did
In absolute terms, then, ilie competitive position of in 1950, but in ilie period since 1970 ilie rel3llive
wages between Puerto Rico and the United States has differential between the United States and Puerto
improved in favor of the Puerto Ricans. Rico has not substantially changed.
Table 5.-Average Hourly Eamings by Industry Group, /96,7-76, United States and Puerto Rico
Industry group 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1967-76

United States _______________ $2.64 $2.8D $2.96 $3.16 $3.38 3.59 3.82 $4.16 $4.57 $4.96 88
Puerto Rico _____ ~ ___________ ._ 1.50 1.63 1.73 1.82 2.07 2.23 2.42 2.60 12.86 91
Tobacco: 1"

United States _______________ 2.27
Puerto Rico _.. ______________ 1.20
3.16 3.47
101 :¡
Textiles: ¡,
United States ___.__________ 2.06 2.21 2.34 2,45 2.57 2.74 2.95 3.19 3,40 3.67 78 ,1
Puerto Rico __________________ 1.37 1.50 1.56 1.61 1.79 1.94 2.10 2.15 12.36 72
United States __________________ 2.03
2.21 2.31 2.39 2.49 2.62 2.78 2.99 3.19 3.41 68 ,1
Puerto Rico _______________ 1.30 1.47 1.58 1.60 1.77 1.83 1.97 2.14 12.34 80
Lumber/wüod: '1
United States ______________ 2.37
PUerto Rico _________ 1.23
3.17 3.36
Furruture: :'!
United States _____________ 2.33 2.47 2.62 2.77 2.90 3.06 3.26 3,50 3.75 3.98 71 i!:
Puerto Rico ______________ 1.38 1,48 1.67 1.73 1.94 2.00 2.18 2.33 12.45 78 i'l
Paper: 1:(
United States ___________ 2.87 3.05 3.24 3,44 3.67 3.94 4.19 4.51 4.99 5,43 89 li l
Puerto Rico ________________ 1.79 1.85 1.99 2.05 2.36 2.49 2.72 2.85 3.D7 72
United States _____________ 3.28
3,48 3.69 3.92 4.20 4,48 4.68 4.97 5.36 5.69 73
Puerto Rico _____________ 1.87 1I
2.03 2.14 2.18 2.67 3.05 3.10 3.23 3.74 100
United States ~ ___________ 3.10 3.26 3.47 3.69 3.94 4.21 4.48 4.85 5.37 5.89 90 I!
Puerto Rico _________________ 1.77 1.98 2.08 2.26 2.64 2.77 3.22 3.64 3.90 120
Petroleum: 1
United States ______________ 3.58 3.75 4.00 4.28 4.57 4.93 5,21 5.61 6.42 7.14 99
PUerto Rico _____________ 3.04 3.06 3.34 3.20 4.00 4.32 4.56 5.28 6.01 98 1
United States ______________ 2.74
PUerto Rico _________________ 1.32
3.40 3.60
United States _________________ 2.07 2.23 2.36 2.19 2.60 2.71 2.81 3.01 3.23 3.44 66
Puerto Rico _________________ 1.17 1.31 1.50 1.55 1.62 1.69 1.84 2.02 12,18 86
United States ~ ____________ 2.82 2.99 3.19 3,40 3.67 3.94 4_21 4.52 4.84 5.29 88
Puerto Rico _______________ 1.78 1.89 2.00 2,12 2.51 2.63 2.99 2.93 3.15 77
Primary metals:
United States ________________ 3.34 3.55 3.79 3.93 4.23 4.67 5.04 5.60 6.17 6.80 103
Puerto Rico _________________ 1. 79 1.93 1.96 2.04 2.28 2.50 2.69 2.88 3.17 77
Fabricated metals:
United States _______________ 2.98 3.16 3.34 3.53 3.74 4.00 4.26 4.59 5.04 5.43 69
Puerto Rico ________________ 1.76 1.93 1.97 2.04 2.34 2.56 2.82 3.02 3.21 82
Machmery except electrical:
United States ________________ 3.19 3.36 3_58 3.77 3.99 4.28 4.56 4.92 5.36 5.76 81
Puerto Rico __________________ 1.76 2.04 2.31 2.24 2.83 2.85 2.90 3.20 3.48 98
Electrical machinery:
United States _______________ 2.77 2.93 3.09 3.28 3,48 3.68 3.89 4.17 4.58 4.91 77
PUerto Rico ________ ~___ 1.61 1.78 1.84 1.91 2.16 2.24 2.55 2.82 3.05 89
United States ____________ 3.44 3.69 3.89 4.05 4,41 4.73 5.07 5.48 6.02 6.54 90
PUerto Rico __________________ 1.71 1.94 2.12 2.22 2.35 2.63 2.87 2.87 3.13 83
United States ____________ 2.85 2.98 3.15 3.35 3.53 3.73 3.90 4.20 4.56 4.87 71
Puerto Rico ___________________ 1.57 1.73 1.79 1.92 2.15 2.36 2.57 2.81 3.05 94
Miscellaneous mantÜacturmg:
United States _______________ 2.35 2.50 2.66 2.83 2.97 3.11 3.27 3.50 3.79 4.01 71
PUerto Rico ______________ 1.30 1.46 1.57 1.66 1.91 2.07 2.40 2.59 2.78 113

1 Below U.S. minimum wage, January 1, 1978, $2.65.

Source: Handbook 01 Labor Statistics 1976, U.S. Department oí Labor, Bureau of Labor Statistics; Puerto Rico Department of Labor.
Census 01 Manulacturtng Industries, San Juan, various years, 1967-76.

Tn tenns of a wage trend, the average húurly earn- Table 6.-Puerto Rican Hourly Wage as a Percentage
ings in PuertO' Rico are increasing at a much more of U.S. Hourly Wage for Selected Years 1967-76, by
Industry Group
rapid rate ~han those in the United States. U.S. wages
increased 273 percent from 1950 to 1977, while Industry group 1967 1970 1972 1974 1976
PuertO' Rican average húurly wages increased 640 Primary metals --------------------- 54 52 49 48 47
percent úver lhe sarue periúd. Múreover, between Transportation
-_.._-------------------- 5053 55
1965 and 1977 the Puerto Rican wage rate has Lumber/wood

-------,,--------- 52 55 53 55 '54
increased at an average annual rate úf 7.5 percent, Paper ._--_."------------ 62 60 60 60 57
Food ----------_._--_.------_. 57 58 58 58 '58
cúmpared tú 6.6 percent for lhe sarue sectúr in the Fabricated metals ---_.-------"" 59 58 59 61 59
Stone-Clay~Glass -------------- 63 62 64 66 60
United States. Machinery except electrical - - - - - - 55 59 66 59 60
It shúuld alsú be noted lhat while lhe impúsition Electrical machinery -~------- .._.. 58 58 59 61 62
Furniture ----..... __ ........ _-- 59 62 63 62 '62
of U .S. minimum wage will be detrimental tú par- ._---~_

Leather -----------------_.-------------- 57 62 60 61 '63

ticular PuertO' Rican industries, the úverall úr average Instruments ------_._-------~-_._-_._--- 55 57 58 61 63
Rubber ---------------------_._------ 48 54 53 56 65
manufacturing wage has beeu abúve the U.S. mini- Textiles --~---~-----_ ...._-_._---- 67 66 65 66 '64
mum wage since 1970. Printing -----_._-------_._--------- 57 56 60 62 66
ChemicaIs --------_._---------_._-_._--- 57 61 63 66 66
In summary, PuertO' Rican wage rates appear tú Apparel ------------ ------_..__ ._--- 64 67 68 66 '69
Miscellaneous manufacturing ------- 55 59 61 66 69
remain highly competitive with U.S. wages. In 1977, Petroleum -------_ .. _------_._----------- 85 75 81 81 84
the average húurly earnings for manufactnring indus- 1 Below U.S. minimum wage January 1, 1978; $2.65/hr.
tries was still únly 56 percent úf U.S. average haurIy Source: TabIe 5.
earnings. At the sarue time, it appears !hat the aver-
age wage in PuertO' RicO' is generally becaming great- Rican tú U.S. wage rates, assuming that the indus-
er than the minimum wage, althúugb the impositian tries most competitive iu PuertO' RicO' wilh respeot tú
úf a $2.65 minimum wage leve! ún January 1, 1978, the United States are those with the lúwest propartion
will r"tard this trend tú sorne degree. of U.S. wage rates.
Table 5 (p. 57) cúmpares U.S. and PuertO' Rican The average wage af three of the most compeotitive
average húurly earnings for productiún wúrkers and industries, tobacco, lumber and waod, and faod,
illustrates the trend of wages by industry group for remain below U.S. minimum wage. In the future, lhe
!he 1967-76 time periúd. In absolute terms, U.S. relative positiún af these industries may change sligbt-
wages have increased relative tú Puerto Rican wages Iy, but wage competitiveness should remain favúrable
for aH industries. Por example, !he wage differential as far as !he total indu~trial structure is concerned.
in the food industry increased from $1.14 in 1967, AH of the Puerta Rican industries have lower
ta $2.10 in 1976. Textiles moved from $.69 in 1967, reIative wage rates than those úf the United States.
tú $1.31 in 1976. Apparel increased from $.73 in Seven of the industries shúw a better cúmpetitive
1967, tú $1.07 in 1976. position !han they did in 1967. The industries with
In tenns of rate of growth, seven industries indi- the greatest wage increases incIude rubber, miscel-
cate a more rapid rate af salary increase in Puerto laneúus manufacturing, printing, chemicals, and in-
Ricó than ún the mainland. These industries are: struments.
túbacco, textiles, paper, petroleum, stane-c1ay-glass, Specific market area cúmpetitiveness is anather
primary meotals, aud transportatiún. In aH other in- important factar to cousider when evaluating wage
dustries; the rate úf salary increase in the United rates. Por thúse industries identified as labor inten-
States exceeded that aí PuertO' Rico. sive, i.e., apparel, textiles, leather and leather prod-
Table 6 presents the PuertO' Rican hOllr1y wage as ucts, the Sautheastern States, both because of their
a perceut af U .S. haurly wage for selected years geographic lúcation and their concentratiún úr in-
1967-76 using table 5 as the base table. Again, the dustrial mix, appear ta be highly cúmpetitive with
seven industry graups in Puerto Rico which iucreased Puerta Rica. Table 7 presents the average haurly
their relative wage rates (in Puerto Rico) remaiu wage fúr selected industries in selected Southern
múre competitive in 1976 thau in 1967. Using wage States.
mte differentials as an indicator úf industry com- As the table indicates, PuertO' Rico remains below
petitiveness, the competitive púsitiún of aH of these average in each úf the separate industry groups. Tbe
industries is better in 1976 than in 1967. Húwever, table also i1Iustrates the range úf wage rates thrúugh-
the competitiveness of a Puerto Rican locatian would out the Uuited States, iu contrast wilh Puerto Rican
best be detennined by a cúmparisún of unit labor wage rates. Por example, lhe range of wages be-
casts between areas. Unfortunately, data is not avail- tween aH industries in the United States is $2.17
able for tbis purpose; sO' lhe aboye analysis is used between the $6.00 wage rate úffered in Indiana and
as an indicator of competDtiveness. the $3.83 offered in Mississippi. At the same time,
The industry groups in table 6 are alsú arranged the wage rate range betweeu the United States and
in rank order of the relative proportiún of Puerta Puerto RicO' is only $ .97.

Table 7.-Average Hourly Wage, Selectedlndustries, Selected States
Industry Puerto Rico Alabama Florida Kentucky Indiana Mississippi ¡ Carolina Texas Virginia Tennessee Georgia

Textiles _________ ._ $2.61 $4.13 $3.64 $3.71 $4.28 $3.77 $3.99 $3.88 $4.00
Apparel ._----- 2.42 3.35 3.51 $3.41 3.08 3.20 3.38 3.19
Lumber(wood ---- 2.55 $4.04 4.30 3.89 3.55 3.74 3.41 3.76 4.01 -,
Leather _____________ ,.-. __ 2.33 3.56 3.07 2.88 3.57 3.16


All industries _._---- 2.86 4.% 4.36 5.14 6.00 3.83 3.91 4.98 4.30 4.24 4.10

1976 (AH industries) Range between States $2.17.

1976 (AH industries) Range between States and Puerro Rico $0.97.
Sources: 1977 Statistical Abstraet oíf the United States, Economic Analysis of the Industrial Incentives Program of Puerto Rico, Administra-
tion far Economic Development, Office of Economic Studies, February 1978.

It would appear then that the industrial concen- payments between the United States and Puerto Rico
tration would pnsh toward those States with reIa- indicates that Puerto Rican benefits are generaIly
tively lower wage rates on the continental United twice that of the United States. The mandatory
States, and in turn relocate to Puerto Rico for an benefit package for Puerto Rico averages about 16
even cheaper wage rateo percent, while the U.S. benefit packages approxi-
However, almost every State in the mainland mate only 9 percent of total payrolI cost.
maintains a heavy industrial concentration (in ap- In the secondary category, "Paid vacations," two
parel, for example), indicating that high wage rates U.S. industry groups offer betler benefits than indus-
do not necessarily identify areas where the.c emigra- tries in Puerto Rico.
tion of labor-intensive industries may occur. In the "Paid sick leave" category, the Puerto
Rican benefits far exceed those of the United States.
Employment Compensation (Benefits) WhiIe Puerto Rican benefits vary from 1.7 percent
A second factor to be considered when compar- of the payroIl in the apparel industry, to 6 percent
ing labor cost differentials between the United States of the payroIl in the lumber and wood products
and Puerto Rico is the cost of benefits, both payroIl industry, the average percentage of payroIl for "Paid
and nonpayroIl, contributed by the employer. Com- sick leave" is 4.4 percent in Puerto Rico and .8 per-
parable statistics on benefits for both Puerto Rico cent in the United States.
and the United States are difficult to find. Often By adding only the comparable benefits in each
quoted differences and benefit packages do not re- of the three categories, the Puerto Rican benefit
flect the total benefit package received by U.S. em- package exceeds the United States by about 10 per-
ployees. In addition, mandatory benefit packages in cent of payroIl cost. Across the board, mandatory
Puerto Rico have been estimated for alI legalIy re- payments in Puerto Rico have increased the cost of
quired payments. These mandatory benefits set a the Puerto Rican benefit package.
floor on benefit packages for specific categories. It should be remembered that the figures quoted
Over the years, the floor has been renegotiated probably underestimate the cost of the Puerto Rican
higher than the mandatory wage leve!. Therefore, benefit package. Only the mandatory requirements
the indication of mandatory wages in Puerto Rico are represented, and the negotiated payments aboye
does not fuIly represent the total benefit package those required have been reported higher in most
offered by industries who have operated in Puerto of the industries surveyed.
Rico over a number of years. Given these two con- A second factor that should be considered is that
straints, the ability to determine the Puerto Rican legaIly required U.S. benefit payments do not rep-
benefit package and the noncomparability between resent the total benefit package afforded U.s. work-
U.S./Puerto Rican benefit packages, an evaluation ers. Total employee benefits in the United States
is difficuIt. Sorne idea of the relative benefit package represent 16 percent higher payroIl costs than the
costs can be estimated, however, by comparing par- Puerto Rican benefit packages. Total employee bene-
ticular portions of each benefit package. fits for aIl industries are 36.1 percent of the payroIl,
Table 8 compares specific benefit categories as a while Puerto Rican benefit packages remain 24.1
percentage of total payroIl in both the United States percent.
and Puerto Rico. It details the benefits! paid by Comparison are diflicuIt because the estimations
each of the industry groups. The summary of aIl of U.S. benefits are based on a survey by the U.S.
industries gives a good indication of the trend of the Chamber of Commerce using a sample of only 761
tabular materia!. The comparison of legalIy required companies. The U.S. survey also did not incIude

Table S.-Comparable Benefits Categories as Percentage of Payroll~ United States-Puerto Rico, 1976

LegallY required Total comparable Total

payments 1 Paid vacations Paid sick Ieave 2 compensation u.s. employee
Industry total benefits
United Puerto United Puerto United Puerto United Puerto employee soutbem
States Rico States Rico States Rico States Rico benefits region 3
Food _______________ ._______ 9.0 16.6 5.0 3.8 1.0 4.3 15.0 24.7 36_2 29.5
Tobacco _____ ._____________ .________ 9.0 16.3 5.0 3.5 1.0 3.7 15.0 23.5 36.2 29.5
Textiles __________________ ,.____ 8_8 14.1 3.5 4.6 .4 3.4 12.7 22.1 27.8 24.4
Apparel _____________________ 8_8 14.1 3.5 4.6 .4 1.7 12.7 2004 27.8 24.4
Lumber __________________ 8.4 16.8 5.7 5.8 .7 6.0 14.8 28.6 32.7 28.0
Furniture _________ ________ 8.4 5.7 .7 14.8 32.7 28.0
Paper __________________________ 8.4 16.3 5.7 4.6 .7 2.6 14.8 23.5 32.7 28.0
Printing ____________________________ 7.4 13.7 5.3 4.6 1.1 2.6 13.8 20.9 32.2
Chemicals ____________________ 7.9 14.3 62 3.9 1.9 4.4 16.0 22.6 42.2 38.5
Petroleum __________________ 6.4 13.3 6.5 3.8 1.9 3.9 14.8 21.0 39.2 40.5
Rubber ___________________ 9.3 15.1 5.8 3.5 .6 4.2 15.7 22.8 40.4
Leatber ____________ 9.3 16.7 5.8 1.9 .6 2.1 15.7 20.7 40.4
Stone-Clay-Glass ______________ 9.4 15.3 5.5 5.8 .5 5.2 15.4 26.3 35.1 34.5
Primary metals ______ ~_____ 9.5 16.1 5.6 3.1 .4 4.0 15.5 23.2 40.6 42.7
Fabricated metals ____________ 9.3 15.8 5.5 3.1 .4 4.0 15.2 22.9 35.1 30.5
Machinery except electrical ___ 8.3 14.4 5.5 3.1 .5 4.4 14.3 21.9 36.1 25.7
Electrical machinery ________ 8.1 14.8 5.4 3.1 1.1 4.9 14.6 22.8 35.0 30.4
Transportation _______________ 10.3 17.4 5.4 3.1 .8 4.4 16.5 24.9 39.9 37.9
Instruments ________________________ 8.1 14.9 5.2 3.1 .7 5.1 14.0 23.1 34.8 27.9
Miscellaneous manufacturing __

15.9 5.4 3.8 .8 4.4 15.0 24.1 36.1 32.7

Employers share only.

a Includes maternity Ieave.
3 Inc1udes Alabama, Arkansas, Delaware, D.C., Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma,
Soutb Carolina, Tennessee, Texas, Virginia, West Virginia.
Source: Employment amd Earnings, October 1977, U.S. Department of Labor, Bureau Di Labor Statistics; Employee Benejits 1975, Tbe
Chamber of Commerce oi the United States of America, 1976; Cost 01 Mandatory Fringe Benelits, Commonwealth oi Puerto Rico, Eco~
nomic Development Administration, Office oi Economic Research, General Economic Division, JuIy 1976.

firms with less than 100 employees. Thus, the sam- labor costs in the United States. The printing, pe-
pIe survey for U.S. firms tends to represent a larger troleum, lumber and furniture, food, machinery ex-
finn size than the representative survey of Puerto cept electrica!, stone-cIay-glass, rubber, fabricated
Rican industries.
Table 9.-Comparison of Total Labor Costs,
Total Compensation United States and Puerto Rico
While additional information is necessary to Total compensation in Puerto Rico as a percentage of total
compensation in the United States
cIarify the differentials between U.S./Puerto Rican
benefit packages, it does seem obvious that U.S. Industry groups with
decreasing relative labor costs
benefits and Puerto Rican benefits, if not on parity,
would tend to be biased in favor of the Puerto Industry 1973 1976
Rican competitiveness. That is, the total U.S. bene- Printing ______ "__~_~ __________________ _ 80 59
Petroleum _________________________________ _ 73 61
fit package would tend to be slightly greater. Even Lumber/furniture ____________________ _ 61 52
in the Southern States where unionization employee Food _________________________________ _ 65 57
Machinery except electrical ____ ._ (1974) 46 43 i
benefits do not represent older industria! core areas Stone-Clay~G lass ___________________________ _ 69 67 l'

Rubber ______________________________________ _
of the United States, the benefits paid to workers Fabricated metals _________________ _
53 52
52 52
are substantialIy higher than in Puerto Rico. Electrical machinery _____________ _ 49 49
The inability to differentiate between the actual Industry groups with
benefit cost or to determine the relationships among increasing relative labor costs !
wage and salary differentials does not entirely dis- Textiles _______________.___________________ _ 56 64
rupt labor cost comparisons. Estimates of total com- MisceIlaneous manufacturing ___ _ 55 63
pensation costs in both Puerto Rico and the United
Transportation _____________________ _ (1974) 55 63 ~
States are available for selected years. In this re-
Tobacco ____________________________ _

ChemicaIs ___________________ _
Leather ___________ ~_________ _
spect, table 9 presents a comparison of tota! labor Apparel _________________________ _ 57 59 ¡
Paper ______________________ _ (1975) 52
costs for 1973 and 1976.
Table 9 is arranged in two sections: The lead sec-
Primacy metals __________________ _
Instruments _____________________ _
63 65 1
tion presents the industry groups which are achiev-
37 39
Source: Survey 01 Current Business, July 1977; Puerto Rican Statisti~
ing a better competitive position relative to total cal Information Work Sheets, Planning Bureau, January 1978.

60 ;

metals, and electrical machinery industdes are all apparel, miscellaneous manufactuing, transportation,
industries which have decreased tbeir labor cost textiles, and primary metals. The labor-Íntensive
relative to the United States in tbe 1973-76period. industries of apparel and textiles botb have a rela-
The second group incJudes tbose industries wbich tiveJy high proportion of labor cost with respect to
are increasing their relative labor costs with respect the United States, and increasing costs over tbe
to the United States and thereby losing tbeir com- 1973-76 periodo
petitive position to some degree (assuming no ma-
jor improvement in labor productivity in eitber area Summary-Competitive Labor Costs
has altered unit labor cost comparison), Important
industries to Puerto Rico in this group are tbe tex- International comparisons of wage rates are not
tile, apparel, and leather industries, where the wage an adequate index of industrial competitiveness.
cost as a total cost of production is bigh. Wage rates or total compensation figures have lim-
A rank order of the industries according to their ited comparability among ~ nations. A number of
1976 proportion of cost to the United States identi- additional locational factors must be taken into ac-
fies instruments, tobacco, machinery except electri- count when an industry relocates or establishes a
subsidiary~ In addition, estimations or assumptions
cal, electrical machinery, lumber and furniture, rub-
ber, and fabricated metals as the more competitive of product competitiveness based on lower labor
industries. costs alone are tenuous.
In summary, the actual wage costs and benefit The impact of regional wage disparity, however,
packages separately present only part of tbe total cannot be discounted. Historically, Puerto Rico has
cost of labor. Many other competitive factors, be- already lost some industries to other Caribbean
side wage costs, are involved in plant location deci- countries. An example is the home needle craft and
sions, incJuding the ease of skiJ] acquisition, man- handstitching of leather sports products.
agement traínabiJíty, productivity of workers, etc. A number of labor-intensive industries in Puerto
However, information on productivity by sector, Rico are presently changing their production systems
unít transportation costs, technology, product iden- in order to take advantage of the lower wages in
tifiability, etc. were difficult to acquire and evaluate nearby countries by transferring labor-intensive pro-
for this sector; therefore the analysis concentrates duction operations ofIisland, with final processing,
on wage trends. Obviously, a high wage area in gen- packaging, marketing, distribution, and administra-
eral does not necessarily preclude the operation of tive functions being carried on in Puerto Rico. Wages
a low wage industry. However, the market tendency in Latin American countries range from 15 percent
would be to drive out noncompetitive low wage in- to 30 percent of wages in Puerto Rico, and these
dustries which has been the case for certaín apparel wage difIerentials alone could push some firms off-
and textile industries where reJative wage costs in island.
Puerto Rico compared to countries benefited by The problem facing planners and policymakers in
GSP are higher. Puerto Rico is the necessity to define as cJearly as
Comparisons of wage costs and benefit packages possible those firrns or industry groups whose pri-
often tend to distort the competitive posítion of mary locational criteria are low labor costs. A list
Puerto Rican industry groups. However, a compari- of labor-intensive industry groups or those indus-
son of tbe total compensation paid to employees in tries with the largest percentage of value added asso-
each of tbe industry groups presents one aspect of ciated witb labor costs incJude: Lumber and wood
wage-cost competitiveness. Those industry groups (54 percent); furniture (54 percent); leather (52
which have relatively low labor costs, compared percent) ; rubber and plastics products (51 percent);
with the United States, and at the same time have paper (46 percent); transportation (46 percent);
decreasing labor costs, 1973-77, incJude: Machin- appareJ (44 percent); textiles (42 percent); stone-
ery except electrical; electrical machinery; lumber clay-glass (40 percent); and printing (40 percent).
and furniture; rubber; fabricated metals; and food. These industry groups would appear to be sensitive
Industries which have relatively low labor costs in to international wage difIerentials.
proportion to the United States, but have increasing International labor cost competitiveness has not
relative labor cost trends incJude: Instruments to- historically been the primary locational factor for
bacco; paper; and leather. firms coming to Puerto Rico. Rather, lower wages
A tbird set of industries may be identified whose relative to U .S. mainland labor costs have been a
relative labor costs are stiJ] below U.S. levels but locational incentive. In tbis respect, labor-intensive
may be less competitive. Industries with a relatively industries in Puerto Rico can best be compared with
high ratio of labor costs with respect to the United indices of total labor cost dífIerentials between the
States, and increasing labor cost trends incJude: United States and Puerto Rico to identify sensitive
Printíng, petroleum, stone-clay-glass, chernícals, industry groups.

Rank Ordering of Industries by Labor Costs However, given the nature of policy decisions on the
island, it is felt that a reasonable beginning can be
Ranking of industries
(Based on the ratio made here to make explicit certain assnmptions en-
of Puerto Rico to tertained by policymakers since the inception of the
Lahor-intensive United States industrialization process. No firm conelusions are
industries (K/L)" lahor costS)2 drawn, but Puerto Rican officials should begin to
Lumber and wood Stone-Clay-GIass focus On the issues involved in developing a sound
Furniture Primary metaIs analytic base for choosing industries to locate On
Leather Textiles lhe island.
Rubber and plastics Transportation
Before proceeding further, a number of problems
Miscel1aneous manufacturing with the data should be noted. Among the problems
Transportation Petroleum
AppareI Apparel are: (1) the lack of comparable data for the main-
Textiles ChemicaIs land and Puerto Rico; (2) the lack of data below
Stone-Clay-Glass Printing the 2-digit level for outpnt measures; (3) the ex-
MisceIlaneous manufacturing Leather treme difficulty in developing capacity utilization fig-
Food Food ures (as a result fluctuations in employment are
FabrÍCated metaIs Paper used as proxies for cyelical effects); (4) the inade-
Tobacco Fabricated metals quacy of lhe price deflators at the individual indus-
Machinery except electrical Rubber and plastics
trial level and the concomitant difficulties with de-
Lumber and wood flators at the aggregate industrial level; (5) insuffi-
Primary metals
Electrical machineIY Electrical machinery ciency of measures for capital stock data and meas-
Petroleum Machinery except electrical ures to determine the impact of skill acquisition
ChemicaIs Tobacco through on-the-job training or formal training pro-
grams; and t6) the lack of policy interest in this
1 Source, table 22. critical area of analysis. Notwithstanding the inher-
.2 Source, table 9.
ent difficulties of this task the following analysis is
Underlined industry groups indicate those industries with improving
labor costs relative to fue United States, 1973-77. useful and will focus the attention of Puerto Rican
analysts for future study.
This comparison does not identify any industry It appears from the analysis that labor produc-
group that is both labor intensive and has a relative tivity has risen at a fairly fast elip in the period
low labor cost ratio-Puerto Rico to UnitedStates. 1965-77. On the basis of the 2-digit SIC level of
From the general position of industries, however, elassification to measure ontput per man-hour in
those which are wage competitive and those which constant 1954 dollars, the increase in labor produc-
are wage sensitive can be identified. tivity was at an average annual rate of about 5.8
percent for lhe whole manufacturing sector.
The study uses production workers as the basis for
COMPARISON OF PRODUCTIVITY calculating man-hours. Table 10 indicates the ratio of
TRENDS AND LEVELS OF THE production workers to total employment in each of
UNITED STATES AND PUERTO RICO the industry groups.
The change in the relative share of production
The dominance of the manufacturing sector in workers to total employees is shown for Puerto Rico
Puerto Rico's development strategy should have in the first four columns and for the United States in
necessitated the collection of data to analyze the the last column. The difference On average between
results of this process. Unfortunately, the collection the mainland and Puerto Rico is about 12 percent
of adequate and verifiable data was not given needed for the sector as a whole. In certain industries, for
attention and support. Where data were collected its example, electric machinery and instruments, the
adequacy for policy guidance was limited. As a re- relative share difference is quite significant. The rela-
sult, the strategy of indnstrialization has been played tive neWness of these specific industries to Puerto
out under uncertainty. One area of inquiry arises in Rico's economy and their production orientation
productivity analysis where cross-sectional and time ralher than marketing and repair orientation would
analysis are important to the evaluation of industrial tend to explain the high ratio. Moreover, the rather
competitiveness. Another useful analysis, for exam- lower honrly compensation relative to the mainland
pie, examines the impact of wage trends On indus- would appear to be a significant explanation for the
trial plant locations and the retention of these plants plants' location on the island.
On the island. Industries which appear more production-oriented,
The analysis of productivity in this section is pre- as indicated in table 10, inelude food and food prod-
liminary and suffers from certain data weaknesses. ucts, textiles, printing and publishing, petroleum,

Table lO.-Production WorkerslTotal Employment chinery except electrical, tobacco, chemicals, and
by Major Industry transportation industries. Previous analyses of these
[In percentages] industry groups indicate that the chemical industry
(particularly pharmaceuticals), the instruments in-
Puerto Rico United dustry, and the electrical machinery industry also
States represent high growth industries in Puerto Rico
SIC Industry 1965 1970 1974 1975 1975
Food ________ _________ 65.4
today. It may be assumed that high growth indus-
20 64.6 70.0 68.2 67.8
21 TohaceD __________________ 95.7 98.4 94.3 93.4 82.8 tries are likely to be enclave indus.tries representing'
22 Textiles ___________ 93.3 92.9 92.0 93.0 86.8 primary production units rather than total industrial
23 Apparel _______________ 95.1 94.7 93.4 93.8 86.0
24 Wood products ~ _______ 72.8 67.9 70.2 71.7 82.2 complexes.
25 Fumiture ________________ 80.1 75.7 78.6 77.8 82.2
26 Paper _______________ 76.7 73.1 71.7 72.1 75.1 The information available througb sorne surveys
27 Printing ______________ 60.9 58.6 57.8 61.1 59.0 suggests that worker productivity in Puerto Rico
28 Chemicals _.... _______ 63.2 64.9 68.6 65.6 56.3
29 Petroleum ______________ 59.9 48.7 56.4 56.2 63.3 compares favorably to the mainland work force.
30 Rubber and plastics _____ 91.2 88.5 86.7 82.0 76.7 As noted aboye, the data to measure, even tenta-
31 Leather ______ .. __________ 94,3 94.2 94.3 93.5 85.4
32 Stone-Glass-Clay _____ ... ____ 81.5 77.6 75.3 75.7 79.0 tively, tbis proposition is nearly nonexistent or of
33 Primary metals _______ 81.5 81.0 77.5 76.0 78.0
34 Fabricated metals __________ 73.9 76.2 77.7 77.1 75.0
limited value. For the industrial sector in aggregate
35 Machinery except electricaL 76.6 76.3 78.8 76,5 65.1 terms the 5-year surveys of the manufacturing sec-
36 Electrical machinery _______.._ 86.2 86.3 81.7 86.2 64.7
37 Transpoítation ______________ . 80.1 77.2 78.4 78.0 69.6 tor conducted by the Bureau of the Census do pro-
38 Instruments _______ .______________._ 88.4 90.3 86.8 87.6 60.0 vide a source of benchmarking data (sorne sources
39 MiscelIaneollS mfg __________ 92.1 90.9 88.5 90.4 76.3
believe the Census is not useful because the Census
Total ._________ ._______ 84.4 83.4 81.9 . 81.9 73_1
may not do as thorough a job on the island as on
the maiuland). In any event, using data from the
rubber and plastics, leather, stone-clay-glass, primary survey and comparing this to sectoral gross domestic
metals, electrical machinery, transportation, and in- product (GDP) data, the analysis shows a discrep-
struments. The 1975 comparisons between the struc- ancy of 20 percent with the GDP lagging behind
ture of Pnerto Rican indnstries and the United the Census data. At the 2-digit subsectoral level !he
States indicate that only five industries in Puerto discrepancies increase drastically to as much as a
Rico have a lower ratio of production workers to 52-percent difference in the value of industry prod-
total employment than in the United States. These uct and industry value added from the Census. Cross
industries include wood and wood products, fumi- checks of social security compensation data and em-
ture, paper, petroleum, stone-clay-glass, and primary ployment data are not suflicient to explain the aboye
metals. The remainder of Puerto Rican industries are data discrepancy and estimates of depreciation, in-
structured more as production units relative to simi- terest, profit, and inventories appear very weak. It
lar industries on the mainland. This is a direct out- is possible that both Planning Board and Census
come of corporate decision to use Puerto Rico as a estimates could be subject to substantial error. How-
production center rather than move headquarters or ever, the Study Team was unable to satisfactorily
other functions to the island, such as sales units for evaluate the discrepancy.
Latin America, etc. The greatest distortion occurs The capital stock estimates used in table 11 are
in scientific instruments, e1ectrical machinery, ma- derived from the analysis in chapter II of the Gen-
Table 11.-Manufacturing Sector Aggregate Measures of Labor Productivity
Production Hourly machinery / Output
workeT w",. eqllipment (GDP)
man-houm rate (millions of 1954 O/L1
Y.", (millions) (doIlars) 19:;4 doIlars) (millions of dollars) K/L (Man-hours)
1965 __ ~ ___________ 172.1 1.26 1,184.8 588_9 13,124.6 3.42
1966 -------------- 185.1 1.31 1,298.6 620.7 13,458.1 3.35
1967 ------------- 196.4 1.43 1,431.6 680.4 14,030_0 3.46
1968 __________________ 207.5 1.59 1,551.0 765.2 14,376.6 3.68
1969 - 222.3
- - - - - - - - - -.:.... 1.71 1,711.1 855.5 14,782.7 3.85
1970 ______________ 218.0 1.78 1,896.7 945.1 16,579.8 4.34
1971 -------------- 215.3 1.93 2,088.6 948.9 18,434.9 4.41
1972 - - - - - - _ . - 224.4 2.04 2,275.8 1,093.1 19,559.1 4.87
1973 -------------- 238.0 2.17 2,457.7 1,218.0 19,834_9 5.12
1974 ___________ 239.6 2.40 2,561.7 1,314.9 20,247_7 5.49
1975 - - - - - - - - - 220.7 2.59 2,632.1 1,256_0 22,656.5 5.69
1976 _. _ _ _ ._.______ 219.5 2.86 2,709.3 1,400.6 23,902.9 6.38
1977 --------------- 229.8 3.11 2,790.4 1,545.0 23,665.1 6.72

1 Qutput valued in 1954 dollars divided by production worker man-hours (column 4 divided by column 1).
Soorce: Puerto Rico Planning Board and Fomento_

eral Economic Assessment. The estimates are ex- Table 12.-Real Output Per Manhour in
plained in that chapter. For purposes of this anal- Manufacturing
ysis, the assumption is that the current cost capital Output per man.hour 1.
series for machinery and equipment reflects private
Year United States Puerto Rico
sector accumulations. Exclusion of plant from the
1970 _______________ ~___________ 116.5 125.4
investment is assumed because of PRIDCO's role in 1971 ___________._______ 117.6 127.5
building and leasing plants for the private investor. 1972 _____________________ 118.1 140.8
1973 _________________ .________ . 123.2 148.0
An average annual increase of 5 percent in capital 1974 ________________________________ " 143.1 158.7
1975 ________________________ 152.4
per employee in the period 1965 to 1977 probably 1976 ______________________ 158.3
implies a rise in labor productivity. This rising ratio 1977 ________________________ 168.3 194.2
is normal during the industrialization process. Com- Average annual increase (percentage) __ 5.4 6.5
parable increases have taken place in the United
1. Output is the gross domestic product for the manufacturing sector
States and other industrial countries during the early in millions of 1967 dollars. The output measure for Puerto Rico was
period of industrialization. The analysis suggests converted from 1954 dollars to 1967 dollars tbrough chain-linking the
price indices.
that output per man-hour would show an increase
Source: Bureau of Labor Statistics, Puerto Rico Planning Board.
over this periodo Output per production worker
man-hour did in fact increase during this period at
an average annual rate of nearly 6 percent. This employment in this sub sector since 1970 has in-
increase implies, also, an improvement in factors creased more rapidly than overall employment in
affecting the labor force, such as training, general the sector.
skill acquisition, improved health, better manage-
ment and organization, etc. SOME PRELIMINARY ANALYSIS OF
During this period hourly wage rates rose on the INDIVIDUAL INDUSTRIES
average 7.2 percent in nominal terms. Real hourly
wages may have increased about 4 percent, assum- As noted in the previous sectiou, a meaningful
ing the consumer price index is an acceptable de- analysis of manufacturing seotor and individual in-
flator. Real output increased by 8.4 percent annual- dustry competitiveness with mainland or third coun-
ly, indicating a decline in the real relative share of try producers is impossible given the data problems,
labor in this· periodo Employment of production not only in Puerto Rico, but for other countries.
workers in the sector increased an average about Comparisons at the 2-digit SIC level are nearly
2.3 percent. The substitution of capital for labor meaningless. For example, comparisons were at-
appears to have taken place, confirming the propo- tempted for SIC 20 (Textile MilI Products) between
sition put forward in chapter I that the manufac- the mainland and Puerto Rico. The results were sub-
turing sector will require a substantial expansion to stantially misleading, becanse the struoture of the
provide increased employment. However, the burden indu&try on the island is different from that on the
of employment creation should not be placed ~ole1y mainland. Knit milis provide about 74 percent of the
on this sector of the economy, or other sectors such value of the sector's output on the island, while on
as services, commerce, and even agriculture. the mainland the percentage is 24 percent. Within
Table 12 is an index of output per man-hour in the SIC 225 enumeration hosiery provides about 56
the manufacturing sector for the United States and percent of the shipment value, whereas on the main-
Puerto Rico. With reference 'lo 1967 as the base land this sector is much less important. Other prob-
year, output per man-hour in the United States in,. lems for comparisons were the weightings for the
creased at an average annual rate of 5.4 percent price deflators for Puerto Rico, which are presentIy
for the period 1970 to 1977. In contrast, output in based on 1954 product account data. These prob-
Puerto Rico increased at an average anuual rate lems' were sufficientIy profound to prevent a mean-
of 6.5 percent. The recent rapid compositional ingful comparison.
change in the structure of Puerto Rico's manufac- However, the Puerto Rican data was used to eval-
turing sector - particularly the increase of invest- uate the trend in output per man-hour aud hourly
ment iu the relatively more capital-intensive in- wage rates for the period 1965-77. These data should
dustries on the island would appear to explain the be used with caution; nevertheless, the trend values
difference between the island and the mainland. may be less distorted than the estimated levels.
Obviously, the aggregate productivity indices are Hourly wage rates for production workers appear to
distorted by structural differences between the econ- have risen 6.5 percent, while real output per man-
omies of the island and the mainland. Moreover, the hour has risen 5.5 percent. Adiusting the hourly
inc1usion of the pharmaceutical companies in the wage rate by the Puerto Rican CPI, real wages may
index for the island tends to exaggerate the increase have risen between 2.5 percent to 3 percent. This
in output per man-hour. However, as noted later, latter increase may suggest a reason for the continu-

Table H.-Labor Pmductivity in the Apparel Table 13 reviews certain key measures for the
and Related Industries apparel industry (SIC 23) in an attempt to analyze
Production trends in produetivity and costs in the period 1965-
workers 77. Hourly wage rates inereased at an average annual
man-hours Output
(m (millions of Output/labor Hour1y wage rates rate of 6.8 percent wi th fringe benefits adding pos-
Y,ar thousands) 1954 dollars) man-hours (in dollars) sibly lOto 15 percent to obtain a labor hourly com-
1963 _ 42,496.9 81,295 1.91 pensation rate. However, real outpllit per man-hour
1964 _ 46,225.-0
1965 _._ 48,172.9
1.93 1.15
appears to have increased aoont 6 percent. Employ~
1966 ~ 53,913.4 100,867 1.87 1.18 ment in the period increased by 2.3 percent, al-
1967 ___ 57,899.5 117,462 2.03 1.30
1968 ~ 61,434.1 143,144 2.33 1.47 though it was down about 9 percent from the 1974
1969 _ 68,094.8
1970 __ 65,355.7
172,710 2.54 1.58 employment peak. Since 1974 there appears to be
188,855 2.89 1.60
1971 __ 62,225.3 174,850 2.81 1.70 slight increase in the hourly wage mte and some
1972 __ 61,825.4 188,682 3.05 1.77 decline in labor productivity suggesting the possi-
1973 .. _ 66,108.2 200,357 3.03 1.83
1974 ___ 66,232.9 219,841 3.32 1.97 bility that the industry may become more sensitive to
1975 _ 59,086.3 195,438 3.31 2.14
1976 _ 62,754.2 231,791 3.69 2.34 wage trends. Again the data must be evaluated care-
1977 ___ 62,453.2
1965-77 ______
243,641 3.90 2.52 fully by policymakers and analysts for ,the industry
12.3 26.0 36.8
to detennine long-term competitiveness orf this in-
1 Employment increase in percenta'ge. dustry, which has an important employment role in
2 Qutput increase in percentage.
3 Average annual increase in percentage. the manufacturing sector.
Source: Puerto Rico Planning Board.
ing operation of the textile industry, notwithstandiag Increased profitability is the primary determinant
the rise in the cost of raw materials (synthetic fibers). which elJJters into a firm's decision to locate in Puerto
However, employment is barely aboye the'level pre- Rico. Two indices of profitability are presented in
vailing in 1963 and sharply down from the peak of this section, profit to sales and profit to eqnity. Table
7,789 reaehed in 1971. As the wage rate has risen, 14 indicates a beforetax profits to sales for the United
among other cost faetors, employment generation in States and Puerto Rico by industry group, allowing
the sector appears to be declining. The long-term a comparison for three time periods, 1973, 1975, and
competitiveness of this industry must be thoroughly 1976, of beforetax profits. (Because of the tax allow-
evalnated by policymakers in anticipation of possible ances in Puerto Rico, the table assumes that before-
further erosion of employment opportunities. tax profits and aftertax profits are similar.)
T able 14.-Beforetax Profits to Sales, United States and Puerto Rico by Industry Group
[in percentages]

1973 (EDA) 1973 1973 (EDA) 1975 1975 1976 1976

Puerto Rico Puerto Rico United States Puerto Rico United States Puerto Rico United States

Industry groups witb greater prof-

itability in Puerto Rico:
Chemicals .._..---_._._- 31.6 46.6 12.0 32.6 12.2 35.1 12.2
Electrical machinery _._._- 25.0 25.7 7.9 33.9 5.8 25.1 7.8
Instruments -'------'--'- 24.5 29.7 15.0 27.1 12.6 28.2 13.S
Machinery except electrical _ 19.0 34.0 10.2 21.9 10.2 23.0 12.0
Pabricated metals _._._--
Rubber ____.___________
14.4 18.2 7.3 16.6 6.1 15.3 8.3
2.1 2.4 7.1 14.8 5.3 12.5 6.6
Textiles ------------- 10.1 11.6 5.2 4.5 2.8 10.0 4.S
Food 5.5 12.9 4.7 7.8 5.4 8.3 5.7
Industry groups with greater prolf-
itability on tbe mainland:
Petroleum ..___._______ 7.5 15.2 9.2 2.7 10.8 1.4 12.3
Primary metals _ _ _ _ o
5.2 10.8 7.2 3.2 6.3 2.2 5.S
Tobacco _______ .__ 10.6 10.5 10.3 12.4 16.8 13.7 15.4
Paper _____ .__ ..._... _ _ 3.8 12.6 9.3 5.5 9.0 8.2 9.0
Stone-Clay-Glass ________ 4.7 25.2 8.1 2.5 4.9 4.3 7.9
Printing _ . ___._ _ _ _ _ ._ 5.6 22.6 8.6 24.2 8.4 9.2 9.4
Industry groups with insufficient
data (1975·76) :
Apparel _ _ _ ._ _ _ _ . 11.1 15.6 4.0 12.4 11.7
Lumber - - - - - - - - - - 6.0 10.0 15.3 2.4
Fumiture __________ 6.0 10.7 6.4 15.3 2.4
Leather -----_._--- 9.3 9.7 4.7 15.2 9.2
Miscellaneous manufacturing 11.8 18.5 6.2 21.4 19.7
All industries _. _ _ _ _ _ _ 13.8 24.7 8.02 17.3 7.4 15.7 8.7

Source: Quarterly Final Report lor Manulacturing, Mining and Trade Corporation, Federal Trade Commission, 1973-76; "Profits Related to
Sales by lndustry Group," EDA Puerto Rico, Worksheets, December 1977; Puerto Rican Statistical Information Worksheets, Planning Bureau,
J anuary 1977.

The comparison of profitability for Puerto Rican Table 15.-Aftertax Profits to Sales, United States and
iudustries presents a data comparability problem. Puerto Rico by Industry Group
Moreover, because the sources of information show 1973 1973 1976 1976
substantial differences in ca1culated profit figures, Puerto United Puerto United
Rico States Rico States
the folIowing analysis is only indicative of industrial
profitability on the island. The rates of profitability Industry groups with greater prof-
itability in Puerto Rico
could, as a result, be higher or lower than the figures Chemicals ________ .. _____________ 31.6 6.8 35.1 7.5
used for the industrial cIassification, but this fact Electrical machinery __________ ... _ 25.0 4.3 25.7 4.4
Instruments ________________ .. _______ 24.5 8.5 28.2 8.0
alone should not prevent aualysis using fue availabIe Machinery except electrical _ 19.0 5.6 23.0 7.5
data. In other sections of this document sectoral Fabricated metals _____________
Rubber _""_____________________________
4.0 15.1 4.8
4.0 12.5 3.8
growth in output, etc., are discussed to broaden fue Textiles ________... _____________ "____ 10.1 2.9 10.0 2.4
Tobacco _____________________.__..__________ 10.6
perspective on industrial competitiveness. Food ______ .___________ .________ 5.5
5.8 13.7 8.5
2.6 8.3 3.4
Listed in table 14 in the first two columns are two Printing _________ ._._~ _______________.. 5.6 4.8 9.2 5.1
Transportation __________ .._________._ 9.5 3.9 8.4 4.8
sets of data available from Puerto Rico. The first Paper ________ .________ ...________ 3.8 5.4 8.2 5.8
set of 1973-76 statistics, columns 1 and 6, were Industry groups with greater prof·
obtained from the industries' worksheets received itability on the mainland:
Petroleum _______ ._____________________ 7.5 7.6 1.4 7.5
from the Puerto Rican Planning Board in J anuary Primary metals _________ .._._______ 5.2 4.6 2.2 3.9
Stone·Clay·Glass ________________ 4.7
1977. Columns 2 and 4, marked "EDA 1973" and 4.8 4.3 4.8
Industry groups with insufficient
"EDA 1975" respectively were colIected from sam- data 1976:
pIe EDA information worksheets that were obtained Apparel ________________ ._._____ 11.1 2.1 11.7
MiscelIaneous manufacturing _____ 11.8 3.2 19.7
from EDA in December 1977. The difference be- Leather ____________ .___________________ 9.3 2.5 9.2
tween the sample group and the Planning Board's Furniture __________________________"_ 6.0 3.6 2.4
Lumber ____________________._________ 6.0 6.3 2.4
worksheets are sometimes substantial; fuerefore,
AH industries ___. __.___________ .________ 13.8 4.7 15.7 5.4
both are incIuded for comparative purposes. Table
14 is separated into three groups. The first group is Source: Quarterly Final Report for Manufacturing, Mining and
based on the comparison of 1976 statistics for Puerto Trade Corporations, Federal Trade Cornrnission, 1973-76; "Profits
Related to Sales by Industry Group," EDA Puerto Rico, Worksheets,
Rico and the United States and indicates those in- December 1977.
dustry groups with the greatest relative profitability
in Puerto Rico. These industries are: Chemicals, Three industry groups, petroleum, primary metals,
electrical machinery, instruments, machinery except and stone-cIay-glass, appear to have a relatively poor
electrical, fabricated metals, rubber, textiles, and competitive position with respect to the mainland,
food. A second set of industry groups is cIassified even if the tax advantages are considered in the
according to those with the greatest profitability on profits to sales ratios.
'¡he mainland. Leading this group is the petroleum However, in 1973, aH of these industries indicated
industry, foIlowed by primary metals, tobacco, paper, much greater aftertax profits to sales in Puerto Rico
stone-cIay-glass, and printing industries. than in the United Sta tes.
A third set of industry groups is identified as those Aftertax profits to sales in 1973 for fuese two
for which data for the 1975-76 time period were not industries were substantiaIly higher on the island
available. These industries indicate, however, that in than on the mainland.
the 1973 comparisons, apparel, leather, and misce1- Of more importance to the investor is an indica-
laneous manufacturing had a better profit to sales tion of aftertax profits to equity. Table 16 shows a
ratio than their U.S. counterparts. In general, aH in- comparison of aftertax profits to equity for both the
dustries in Puerto Rico in 1976 indicate almost United States and Puerto Rico. Ten industries, ar-
double the profitability in terms of profit-to-sales ranged by the 1976 proportion of aftertax profits to
than those industries on the mainland. The 1976 equity, have an equal, or greater profitability in
comparisons use the total data set obtained from Puerto Rico. The fabricated metals industry indicates
the Puerto Rican Planning Board rather thanthe a break-even point with similar returns to equity for
sample data set obtained from EDA. the United States and Puerto Rican industries. Trans-
Table 14 compares U.S./Puerto Rican industries portation, instruments, electrical machinery, printing,
beforetax profits to sales. Discounting the tax ad- rubber, and food industries show the greatest advan-
vantages, eight industry groups in Puerto Rico have tage when comparing aftertax profits to equity be-
a competitive advantage over U .S. counterpart in- tween the United States and the island.
dustries. More importantly, however, is the after- Five industry groups have greater profitability
tax profits to sales. Table 15 shows that the after- (profits to equity) on the mainland. Particularly
tax profits to sales ratios for industry groups in important in this industry group is the petroleum
Puetro Rico increase substantiaIly compared to industry, long considered alead industry in Puerto
beforetax profits to sales ratios. Rico. The lack of profitability is also reflected in the

Table 16.-Aftertax Profits to Equíty, Uníted States the competitive position of Puerto Rican industries is
and Puerto Rico deelining in comparison to their U.S. counterparts.
1973 1973 1976 1976 In summary, profitability remains the single most
Puerto United Puerto United important variable considered by industry or manu-
Rico States Rico States
facturers relocating or beginning operations in Puerto
Industry groups with greater prof-
itability on Puerto Rico:
Rico. The profits to equity ratio s identify five indus-
Transportation - - - - - - - - - - 44.3 13.0 58.8 15.9 try groups which have lower aftertax profitability in
Instruments __________ 23.7 15.9 23.1 14.7 Puerto Rico than in the United States: Textiles,
Electrical machinery _________ 26.7 13.1 20.6 12.5
Printing ________________ 31.6 12.9 21.4 15.1 paper, primary metals, pertoleum, and stone-elay-
Rubber -----------_._._-----_.._- 4.5 12.5 15.2 10.8 glass. The case of the petroleum industry represents
Pood -----.--._-_._-_... _------- 13.5 12.8 17.2 14.9
Chemicals --------_._--------_._---- 34.1 14.8 17.6 15.5 the pricing anomaly of this energy source on the
Machinery except electrical - 18,2 13.4 17.3 15.5
Tobacco _. __________ ._______ .___ .__ . __ ._ 26.3 14.8 16.0 15.9 mainland. In two of these industry groups, paper and
Fabricated metaIs _._._. _______ 21.9 13.9 15.4 15.4 petroleum, the profit margin favorable to the United
Industry groups with greater prof- States has grown from 1973-76.
itability on the mainland:
Stone-c1ay-gIass --.,---------------------- 23.5 11.2 2.4 11.9 A second group of industries also has decreasing
PetroIeum -_.-----------------_._._---------- 25.3 11.6 6.9 14.4 profit margins, although profitability is stiH greater
Primary metaIs ---------_._-------- 46.3 10.1 2.4 8.3
Paper ------------------------------------- 23.0 12.9 11.5 13.8 in Puerto Rico (1976); this group ineludes fabri-
Textiles ------------------------------- 19.3 9.0 6.4 8.0 cated metals, tobacco, machinery except electrical,
Industry groups with insufficient chemicals, and printing industries. Firms within these
MisceIlaneous manufacturing __ 26.3 11.5 40.0 industry groups will experience increased competi-
Apparel -------------------- 23_7 10.8 21.0 tiveness with lhe U.S. mainland if the present trend
Leather ----------.. _------------ 16.0 9.4 22.0
Furniture ----------------._--- 15.4 13.2 22.1 continues.
Lumber ------ ---------_._--_._---- ----- 22.4 20.5
Nine industries have higher returns to equity in
All industries -----.-----_.-._..._..._--- 26.6 12.8 16;7 14.0
Puerto Rico than in the United States (1976). In
Source: Quarterly Final Report for Manufacturing, Mining and order of greatest profit margin, these industries in-
Trade Corporations, Federal Trade Commission; "Profits Related to
Average Equity by Industry Group" EDA Puerto Rico, Worksheets,
elude: Transportation (47.9 percent differential), in-
December 1977. struments (8.4 percent), electrical machinery (8.1
percent), printing (6.3 percent), rubber (4.4 per-
growth rates associated with textiles over the last cent), food (2.3 percent), chemicals (2.1 percent),
decade. The emigration of the textiles industry from and machinery except electrical (1.8 percent).
Puerto Rico may be a continuing process.
Insufficient data exist for five industry groups to ENERGY COSTS
determine if 1976 aftertax profits to equity for
Puerto Rican industries are competitive with those Another potential indicator of the competitive po-
in the United States. This category ineludes the ap- sitión of Puerto Rican industries is electrical power
parel and leather industries, often considered to or energy costs. These costs have become accentu-
operate with marginal profits in Puerto Rico. In ated in the production processes because of the pe-
1973, the profit to equity rates for both of these in- troleum price increases in 1973-74. This fuel price
dustries were almost twice that of U.S. counterparts. increase has increased electrical power costs sub-
The impact on profitability in the petroleum in- stantiaHy because aH of the generating plants in
dustry resulting from the new petroleum pricing is Puerto Rico use petroleum.
evident in the drop from 25.3 percent profit to equity Table 17 depicts the average cost of industrial
in 1973 in Puerto Rico (11.6 percent profit to equity electric bills for Puerto Rico and the United States
in 1973 in the United States) to 6.9 percent 1975 for 1963-77. In the table, the average electrical
profits to equity in Puerto Rico (14.4 percent 1976 bills for Alabama and Louisiana are presented.
profits to equity in the United States). Typical industrial electrical bills in lhese States rep-
Table 16 also illustrates the general erosion or resent the most and least expensive energy costs on
reduced competitiveness in aH Puerto Rican indus- the GuU Coast. Hawaii is included as a comparable
tries during the 1973-76 time periodo The index for insular area dependent on petroleum as a fuel base
aH industries in 1973 shows a 13.8 percent difference for power generation. For each of the geographic
in aftertax profits to equity between Puerto Rico and areas, three scales of kilowat!-hour usage are pre-
the United States. By 1976, that percentage was re- sented to indicate the differing rates for industrial
duced to 2.7 percent. Although problems of aggrega- use.
tion easily distort profitability of particular industries In general, lhe cost of electricity in Puerto Rico
or firms, the general trend is unmistakable. Except in 1977 exceeded aH other States represented. The
for the transportation, rubber, and food industries, absolute rates in Puerto Rico are $.02 to $.03 higher

Table 17.-Typical Industrial Electric Bilis, Seleeted Years 1963 to 1977, Current $/kWh
U.S. costs as percentage of Percentage
Puerto Rican inerease
per kWh
1963 1974 1975 1977 1963 1977 1963-77

Alabama: 1
30,000 kWh at 150 kW .016 .023 .034 .038 55 56 138
60,000 kWh at 300 kW .~ _ _ .016 .023 .034 .037 62 63 131
200,000 kWh at 1,000 kW _ _ o .010 .020 .031 .033 42 57 230
Lomsiana: ,
30,000 kWh at 150 kW __________ .020 .023 .024 .031 69 46 55
60,000 kWh at 300 kW _______________ .018 .021 .022 .025 69 42 39
200,000 kWh at 1,000 kW ______ .016 .019 .020 .023 67 40 44

30,000 kWh at 150 kW ________ .025 .029 .044 .049 86 72 96
60,000 kWh at 300 kW _____ .024 .027 .042 .047 92 80 96
200,000 kWh at 1,000 kW _____ .023 .024 .038 .043 96 74 87
U.S. average:
30,000 kWh at 150 kW ______ .021 .030 .039 .045 72 66 114
60,000 kWh at 300 kW _~ ____ .019 .028 .037 .043 73 73 126
200,000 kWh at 1,000 kW . ____ .017 .026 .034 .041 71 72 141
Puerto Rico:
30,000 kWh at 150 kW ______ _029 .048 _054 _068 100 100 134
60,000 kWh at 300 kW _ _ _ _ _026 .038 .045 _059 100 100 127
200,000 kWh at 1,000 kW ____ _024 .038 .044 _058 100 100 142

1 Most expensive Gulf Coast State, 1977_

2 Least expensive Gulf Coast State, 1977_
Source: Typical Electric BilIs, Various Years, 1963-67, Federal Power Cornmission_

per kWh than in the United States in general, or the The relative position of Puerto Rican and U.s.
Gulf Coast States in particular. The highest com- electrical cost highlights an important consideration
parable electric utility rates are found iu Hawaii of the changing competitiveness of Puerto Rican
where the rates are still $.01 per kWh lower than in industries. At all three electrical rate categories, U.s.
Puerto Rico at most scales of consumption. electrical costs, while lower than Puerto Rico's, have
The rate difl'erentials for both 1963 and 1977 are remained relatively the same from 1963 to 1977,
represented as a ratio of U.S. to Puerto Rican elec- averaging about 70 percent of Puerto Rican elec-
trical costs, in columns 5 and 7 of the tableo Using tricity costs.
these ratios, Louisiana stands out as the low cost
area. Table 18.-Industry Groups Ranked by Fuel Casts:
Puerto Rico·United States Comparisons
Lonisiana, the least expensive Gulf Coast State,
has typical industrial electric bills ranging 60 per- Total fuel costs Electricity costs
cent lower than the average industrial electric bills Puerto United United Puerto United United
in Puerto Rico. Alabama, the most expensive Gulf Rico- States- States- Rico- States- States-
Industry group 1972 1971 1975 1972 1971 1975
Coast State, has electric bills ranging on the average
of 40 percent lower than the Puerto Rican costo The Chemicals - 1 2 2 1 2 2
Petroleum ------------ 2 6 6 2 11 12
average electric bill for Hawaii, while much closer Food ___________ 3 3 4 3 3 3
to the cost of electricity in Puerto Rico, remains 20 Electrical machinery __ 4 11
4 7
Textiles ------------- S S
percent below Puerto Rican costs for power. Aver- Apparel --------- 6 15 15 6 15 15
age U .S. electric bills range generally 30 percent Stone-c1ay-glass - - 7 5 S 8 9 8
Fabricated metals __ 8 9 8 7 8 7
cheaper than the typical industrial electric bills of Primary metals ----
Paper __________________
1 1 9 1 1
4 3 12 S 4
Puerto Rico. Rubber and plastics _ 11 13 12 10 12 11
Instruments _________ . 12 17 16 11 18 16
Table 18 also indicates the percentage increase of Tobacco ______________ 13 20 20 13 20 20
cost per kWh in 1963 to 1977. At the two larger Leather _ _ _ .___ 14 19 19 14 19 19
Printing _________ 15 16 14 17 13 14
scales of consumption, the per kWh increase for Fumiture ___ ._______ 16 18 18 16 17 18
both the United States and Puerto Rico remain Machinery except
electrical _ _ _ _ 17 8 9 19 6 6
about the same. Miscellaneous
Comparisons of the 1963-77 period indicate that manufacturing ___ 18 14 17 18 16 17
Lumber, wood ___ 19 12 13 15 14 13
the cost of power in Puerto Rico has increased with Transportation _______ 20 7 7 20 4 S
respect to Louisiana and Hawaii. In fact, the relative Source: Census 01 Manulacturing, Puerto Rico, 1972, U.S. Depart-
cost of U .S. industrial electricity was lower in 1977 ment of Cornmerce, Burean of the Census; Annual Survey 01 Manu-
than in 1972, at the lowest pricing category (30.000 lacturers, 1974, "Fuels and Electric Energy Consumed," Preliminary
Statistics for the United States, Industry Group Selected Industries,
kWh at 150 kW). March 1977, U.S. Department of Commerce, Bureau of the Census.


The potential impact of high electrlcity costs by machinery, fabricated metals, and stone-c1ay-glass.
industry is shown in table 18. This table presents, The food industry, in the United States and Puerto
for each 2-digit industry, a rank order of total fuel Rico, consumes about the same proportion of e1ec-
costs fo three time periods. Information available trical power with respect to total energy costo
for Puerto Rican industries was limited too 1972. The division of electrical power cost into electri-
U.S. industrial fuel costs for 1971 are presented for cal energy cost and other fuels becomes important ' .
comparison. U.S. fuel costs for 1975 are presented when considering 'the tradeoff between space heating
to determine if any possible structural shift occurred and natural electrical power cost in Puerto Rico.
within the industry groups in the 1972-75 time Total fuelcosts for industries primarily located in
periodo the industrial heartland of the United States are in
It appears from this table that technological ad- the northern regions and may spend proportionately
vancement or structural change has not occurred in less money on electricity for lighting and operation
the U.S. industries from 1971-75. Thus, the cost of processing machines, but more on fuel oils for
differences that existed between Puerto Rico and the space heating in the winter months.
United States among industry groups in 1972 prob- In ürder to determine the impact of high elec-
ably exist today. trical costs in Puerto Rico and its influence on the
The rank order of industries most impacted by competitiveness of particular industry groups, it is
fuel costs or electrical energy costs in Puerto Rico necessary to know not only the absolute cost of
inc1ude: Chemicals, petroleum, food, electrical ma- fuels (see table 19), but to identify those industries
chinery, textiles, apparel, stone-c1ay-glass, fabricated whose fuel costs are high in proportion to total
metals, primary metals, and papero value added. Table 20 shows, for each industry
Exaggerated energy cost differences occur in a group for selected time periods, the energy costs as
number of industries, U.S';Puerto Rico . . The U.S. a percentage of value added for the U .S. and Puerto
subsidiary industries in Puerto Rico may perform a Rican 2-digit industry groups. As indicated in the
particular production function which consumes more table for all time periods, the top five industries
power or the level of aggregation may totally mask remain constant for both Puerto Rico and the
different production processes within one industry United States. These industries, petroleum, primary
group. metals, paper, chemicals, textiles, and stone-clay-
Comparisons of the percentage of electricity as glass, carry the greatest proportion of value added
total fuel costs for Puerto Rican industries with U.S. associated with electrical fuel energy costs. Much
industries show that, for the most part, Puerto Rican smaller proportions of energy costs (less than 1.5
industries spend more money on electricity than on percent) are associated with leather, tobacco, furni-
fue!. (See table 19.) Only four industries in Puerto ture, printing, apparel, machinery except electrical,
Rico have a lower percentage of electricity costs to and instruments industries in Puerto Rico.
total energy costs than their U.S. counterpart indus- By comparing table 19 with table 20, and select-
tries. These industries inc1ud'1 printing, electrical ing industries that consume the greatest amount of
electricity and those whose electrical costs are a high
Table 19.-Electricity Cos! as a Percentage of Total
Fuel Costs: United States-Puerto Rico comparisons proportion of value added, the industry groups in
Puerto Rico that are in a poor competitive position
1972 1971 1975 relative to energy costs may be identifled; those in-
Industry group Puerto Rico United States United States
dustries include petroleum, chemicals, textiles, food,
Tobacco ________________ 92
Instruments ______ ________________ 90
49 and electrical machinery. Miscellaneous manufac- I
Textiles .________________ ~__ 87 60 60 turing industries, machinery except electrical, print- I
Furniture _ ______________________ 87 6' 63
Rubber and plastics _________ 85 ing, furniture, and transportation, as these industries !!
Leather ______________________________ 85 67 63 I1
Apparel ________________________________. 80
60 58 now exist, have a better position relative to indus-
75 74
Lumber/wood ____ 78 46 45 tries in the United States. :1
Machinery except electrical
Transportation ______________________
Printing ___ ____________________________
Primary metals __________________.
Fuel and energy costs are also important when
reduced profit~ and other factors of value added are I
Electrical machinery ..___._ 67 70 70
evaluated. Table 21 shows the percentage of value
Paper __ ._....____ .____ .________ 61 36 30 added associated with labor, fuel and electrical
Fabricated metals _______________ 57 60 57
Chemicals ___________________________ 52 47 43 costs, and profits for Puerto Rico in 1972. A high
Food .___________________________________ 48
Petroleum .__ ._________________________ 34
48 43 propotion of value added ju fuel and electrical
30 23
Stone-Clay-Glass ____________ " 28 31 30 energy costs, combined with a high proportion of
value added in labor costs, plus a low proflt, identi-
Source: Cemus 01 Manufacturing, Puerto Rico, 1972, U.S. Depart-
ment of Cornmerce, Bureau of the Census; Annual Survey 01 Manu- fies those industries which are less competitive in
facturers, 1974, "Fuels and Electric Energy Consumed," Preliminary Puerto Rico, and therefore sensitive to changes in
Statistics for the United States, Industry Group Selected Industries,
March 1977, U.S. Department of Commerce, :.Bureau of the Census. electricity and energy costs.

Table 20.-Industry Graup Energy Costs as a Percentage of Value Added: Puerto Rico·Uníted States Comparisons

Total fue1 costs Electricity costs

United States

1972 1971 1975 1972 1971 1975 Value

Puerto Rican United States United States Puerto Rican United States United States added
Value Value Value Value Value Value dollars
Industry group added Rank added Rank added Rank added Rank added Rank added Rank = 100) Rank

Petroleum 21.9 1 11.3 1 17.0 1 7.4 1 3.4 2 4.0 4 7.1 1

Primary metals -_

......_._---- 8.8 2 9.9 2 15.0 2 6.1 2 4.5 1 6.2 1 7.1 2

Paper ._._---_ .. _ - - - - 6.9 3 7.5 4 12.2 3 4.1 3 2.7 3
5 4.2
Chemica1s . ._-----
Textiles ________________
6.1 4 5.7 5 9.6 5 3.1 5 2.7 3
4.1 5 4.0 7.2 3.5 4 2.4 5 4.3 2 4.0 5
Stone-Clay-Glass - - - - - - - 3.6 7.7 3 11.9 4 1.4 2.4 3.6 3.8
Rubber and plasties - - - - - 3.3 2.8 4.7 2.7 1.9 2.9 3.1
Food __________________ 2.8 2.6 3.9 L3 L3 1.7 1.9
Fabricated metaIs - - - - - - - 2.5 2.0 2.8 1.4 1.2 1.6 1.9
Electrical machinery _.._------ 2.3 1.4 2.0 1.6 1.0 1.4 1.4
Lumber and wood _ 1.8 4.3 5.4 :11.2 2.0 2.4 2.3
Transportation -------------- 1.6 1.4 2.2 1.1 .9 1.4 L3
Leather _____________ 1.5 1.5 2.2 L3 .9 L3 1.1
Tobacco ----------------- 1.4 .8 L3 1.3 .4 .6 .6
Fumiture ----------------- 1.4 1.6 2.2 :11.2 1.0 1.4 L3
Printing _____________ 1.2 1.0 L3 .8 1.8 .9 1.0
Apparel ____________________________ 1.1 1.1 1.5 .9 .8 1.1 1.0
Machinery except electrical _ _ _ l.O 1.5 1.8 .7 1.0 1.2 1.2
Instruments ----------_.._--------- 1.0 1.0 1.4 .9 .6 .8 .9
MiscelIaneous manufacturing _ _ 1.0 2.4 2.1 .9 1.6 L3 L3

:1 Estimates for tumber and wood, and fumiture are aggregated.

Source: Census 01 Manufacturing, Puerto Rico, 1972, U.S. Department of Commerce, Bureau of the Census; Annual Survey 01 Manulacturers,
1974. "Fuels and Electric Energv Consumed," Preliminary Statistics For the United States, Industry Group-Selected Industries, March 1977.
U.S. Department of Commerce, Bureau of the Census.

Industries with relatively high energy costs. but competitive positions are less sensitive to increased
illso with high profits to value added ratio inc1ude power costs are machinery except electrical, apparel,
petroleum, chemicals, stone-c1ay-glass, fabricated instruments, and miscellaneous manufacturing.
metals, and electrical machinery. Of these indus-
tries, the chemical, electrical machinery, and fabri-
cated metal industries have such a high profit to SUMMARY AND CONCLUSIONS
value added ratio that additional power costs will
not hurt their competitive position. Industries whose Four major data sets are reviewed in the analysis
of the competitive position of Puerto Rican indus-
Table 21.-Percentage of Value Added for Labor, Fuel try. Two cost factors are considered, labor and
and Electricíty, and Profits: Puerto Rico 1972 power. Labor productivity and industry group profit-
ability are the remaining quantifiable factors consid-
Fue! and
Industry group e1ectricity Labor Proñts ered. The analysis has not considered a variety of
Petroleuin ___ ,_ _ _ _ _ _ _ :121.9
intangible as well as demand factors that often in-
23 '22
Primary metals _" ______________ _
Paper ______________________ _
:18.8 31 17 fiuence an industry's competitive position.
:16.9 '46 10
Chemicals ________________ _ 1.6.1 13 '42 The analytic results summarized below refiect dis-
Textiles _________ "~""" _________ _ :14.1
Stone-clay-glass _______.._______ _ 13.6
'42 15 cussions with industrial leaders and public officials
'40 '18
Rubber and plastics _____________ .____ _ :13.3 '51 10 in Puerto Rico, a careful review of available litera-
Food __ .______________________ .._. :12.8 35 15
Fabricated metals _____._________ _ 1.2.5 35 1.26
ture, and the analysis documented in this chapter.
Electrical machinery ______________ ._
Lumber and wood __________ _
:12.3 3D '48 A surnmary of the results follows:
1.8 :1,254 '10
Transportation _____________ _ 1.6 '46 -1
Leather _______________ ~ 1.5 '52 15 1. The data required to conduct a detailed analy-
Tobacco _. _____________ _
Furniture __ _
1.4 35
, 10
sis of Puerto Rico's competitive position intema-
Printing ________________ _ L2 '40 8 tionally is not available. The onIy comparable data
Apparel ___________ _ 1.1 '44 '20
Machine except electrical _________ . 1.0 34 '37
available were labor costs for selected countries.
Instruments _ _ . ________ _ 1.0 34 , 31 These data indicate that Puerto Rico remains com-
Miscellaneous manufacturing _ _ 1.0 '40 '27
petitive in labor costs relative to deve10ped nations.2
:1 Ranked in top 10 industry groups.
Z AIthough not anaIyzed in thls paper, tbe large wage rate differ-
II Lumber and wood and fumiture and fixtures aggregated in base
data seto entials between Puerto Rico and other Latin American countries im-
plies that labor-intensive mdustries, ar products of those industries
Source: Census 01 Manufacturing, Puerto Rico, 1972, U.S. Depart- where most of the vaIue added is associated with labor costs, will
ment of Commerce, Bureau of the Census. face intemational competition.

2. The imposition of U.S. minimum wage regula- 6. Two profitability indices were reviewed. Of
tions on Puerto Rico could negatively impact fue these, profit to equity for each industry group is l'
island's competitiveness in a number of industries. probably fue most important. Industries with fue l'
First, the U.S. minimum wage may increase fue dis- best profitability relative to similar U.S. industries l'
parity between Puerto Rico and fue Caribbean indude: Electrical machinery, instruments, and 1

region. Sorne production units could relocate to

nearby islands; and in sorne instances (e.g., con-
7. A comparison of energy costs for each indus-
.. l'

fectionery, cookies and crackers) final product try group shows that the relative competitiveness
pricing by fue island's industries may not be com- of energy as a factor of production in Puerto Rico I
petitive. Second, while Puerto Rican wage rates re- has changed little through 1972.' Electrical power 1,
main below U.S. rates, the differential could costs in Puerto Rico have always. been approxi- i!
decrease. mately 30 percent higher fuan average industrial ji

3. A single indicator of fue competitive position electrical power costs in fue Uuited States. OPEC il
of Puerto Rican industries is difficult to isolate. price increases since 1973 may have altered the 11

However, the profit to equity comparison with U.S. relative competitiveness of Puerto Rican energy
industries is probably the most important invest- users, even wifu entitlements. As U.S. oil prices rise I
ment criterion presented. to worId levels, however, Puerto Rico's relative po- 1I

4. Wage rate comparisons by industry group be- sition may not appear as adverse as fue recent past
( 1974-77) would tend to indicate.

tween fue United States and Puerto Rico indicate !

that 9 of 20 industry gronps reviewed were in a Electrical power costs, however, have increased
better competitive position in 1977 fuan they were significantly in Puerto Rico and in the United States
in 1973 (before minimum wage). Those industries from 1963 to 1977. Industries fuat are most af-
with increasing labor-cost competitiveness a.nd rela- fected by these power cost increases include: Chem-
tively low wage rates with respect to fue United icals, instruments, printing, apparel, and miscel-
States indude: Machinery except electrical, electri- laneous manufactuting.
cal machinery, lumber and wood, rubber and plas- Table 22 ranks industry groups against fue four
tic. and fabricated metals. major indicators used in this analysis. The initial
Ofuer industry groups wifu favorable wage rates column Iisting is ranked by rate of employment
indude tobacco and instruments. growth from 1967 to 1976. The industry considered
5. Two quasi-productivity indices are reviewed most competitive in each category is Iisted as num-
in the analysis: Value added per employee, and ber one (1).
value added per dolIar of payrol!. Industries which While comparisons across the data sets are spe-
show the greatest productivity advantage over simi- cious, a number of industry groups in Puerto Rico
lar US. groups using thes$' measures indude: Chemi- continue to be strong competitors with respect to
cals, fabricated metals, machinery except electrical, fueir U.S. counterparts. These industries indude:
and primary metals. Machinery except electrical, instruments, electrical
Table 22.-Competitive Position of Puerto Rican Industries
Ranked by employ- Fuel cost as a
ment growth Labor cost Value added Value added per Protit to Profit to proporuon of
1967-76 competitiveness per worker doIIar of payroll ,ales equity value added
Chemicals -------------- Competitive Very high Very high Very high Competitive Low
Machine except
electrical ___ .______________ Very high Vory high Veryhigh Very high Competitive Very hiSh
Instruments --------------- Very high Competitive Competitive Very high Very high Very high
Wood products Very high Very low Very low Very low Competitive Competitive
Electrical machinery Very high Competitive Veryhigh Very high Very high Competitive
Petroleum _______________ Competitive V,ry high Competitive Very low Low Very low
Fabricated metals _____ Competitive Very high Very high Very high Low Competitive
Food ________ ~ ___ ~ __ Competitive Low Very high Competitive Competitive Low
Printing ---~------ Competitive Competitive Competitive Low Competitive Very high
Paper __________ ~~~ Competitive Low Very low Low Very low Very low
Primary metals _~_ Very Iow V,ry high Competitive Very low Very low Very low
Rubber and plastics _____ Competitive Very low Very Iow Competitive Competitive Low
Apparel - ---------------- Low Competitive Low Competitive Very high Very high
manufacturing ----- Low Competitive Competitive Competitive Very high Very high
Stone-clay-glass Very low Low Low Very low Low Low
Tobacco _________ Very high Very low Very low Competitive Low Competitive
Furniture _______ ~ __ Very high Competitive Competitive Low Competitive Competitive
Textiles ------------~~
Low Competitive Competitive Competitive Very Iow Low
Transportation _ Low Very low Low Low Very high Competitive
Leatber __________________ Competitive Low Low Competitive Competitive Competitive
1 Furniture and wood products combined_
Source: Derived by IILED_

macbinery, chemicals, fabricated metals, apparel, A final set of industries demonstrates a relatively
and miscellaneous manufacturing industries. poor competitive position relative to their counter-
A second set of industries appears competitive
part industries in the United States. These inc1ude:
but does not carry consistently bigh ratings in each
of the variables considered. The industries in tbis Tobacco, transportation, textiles, wood products,
set include: Printing, furniture, food, rubber and petroleum, primary metals, paper, and stone-c1ay-
plastics, and leather. glass.

Chapter VI.-The Puerto Rican Industrial
Incentives Program
INTRODUCTION tax incentives, and (4) appraises recently approved
modifications in the existing pragram.'
Incentives for investment were a major e1ement
in the ambitious Puerto Rican economic develop- FEDERAL AND PUERTO RICAN
ment pragram which was designed to transform the INDUSTRIAL TAX STRUCTURES
island's economy fram an essentially single agri-
cultural crap economy to an industrial economy. Federal Structure Prior to 1976
The major thrust nf Operation Bootstrap was to
develop manufacturing as the "lead" sector in the Tax Refonn Act
generation of income and employment. The strat- Prior to the Tax Reform Act of 1976, most manu-
egy was to develop the sector by exploiting Puerto facturing corporations in Puerto Rico operated
Rico's cost advantages, especially its low wages, and under Section 931 of the Internal Revenue Code as
by taking advantage of its free access to the U.S. "possessions corporations." In arder to qualify for
mainland's commercial and financial markets. 931 status, a firm was required to meet two gross
income tests:
Chapter V discussed the signillcance oí Puerto
Rico's wage strncture. This chapter will focus on • Eighty percent or more of its gross income,
the financi.J incentives, the Investment Incentives inc1uding income fram investments, for a 3-
Act, and Puerto Rico's government loans to indus- year period preceding the close of the taxab1e
try. Fram an investment incentives perspective, the year, had to be derived fram sources within a
most important aspect of the Federal relationship U.S. possession; and
was the ability of subsidiary U.S. domestic carpora- • Fifty percent of corporate gross income had to
tions investing in Puerto Rico to qualify as "posses- be derived from the "active conduct of a trade
sions corporation" under section 931 of the Internal business within a possession or the United
Revenue Code, and thus be ab1e to exc1ude Puerto States." 2
Rican operations income fram corporate taxes. To Once the status was attained, a Puerto Rican
further increase its attractiveness to external inves-
based section 931 corporation could exc1ude fram
tors, Puerto Rico initiated its own tax incentives
its gross income any income fram sources outside
program in 1947. Firms meeting certain gross in- the United States (the 50 States plus the District of
come and line of production requirements and quali-
Columbia). By avoiding earning or income within
fied individuals receiving income fram these firms
the United States, the section 931 firm could be
became exempted fram Commonwealth corporate comp1etely exempt fram Federal taxes. If these
and partnership income and real property taxes, and
firms were also recipients of a Puerto Rican tax
fram municipal leve1s. The Co=onwealth alsn
began praviding real estate facility subsidies, worker 10n June 2, 1978, the Cmomonwealth Legislature approved severa!
revisions to the existing tax incentives program which were sub-
training, and industrialloans. mitted by GoverDor Romero Barcelo. The new law permits business
finns to choose between the existing programs and the newly ac-
With respect to tax incentives, this chapter (1) cepted proposals. Accordingly, references will be made to both the
e'existing" (pre-lune 1978) and "proposed" (post-lune 1978) tax
describes the nature of the special U.S. tax status exemption programs.
2 In addition to Puerto Rico. American Samoa, Guam, the Canal
accorded possessions corporations, (2) examines the Zone, and certain Pacific Islands are considered as U.S. possessions
infiuence of the U .S. and Puerto Rican tax laws on for tax purposes. The possessions corporation is, however. largely
a Puerto Rican phenomenon. Of 624 firms currently operating under
firms' tax planning and investment behavior, (3) the Tax Reform Act of 1976, 612 are in Puerto Rico. Data provided by
provides a conceptual framework for evaluation of U.S. Department of the Treasury. Office oí Tax Ana1ysis. MaY 1978.

exemption, as was nsnally the case, their earnings qualifying manufacturing corporations are given
conld be free from any corporate income tax. exemption from the net income tax, real and per-
The section 931 corporations' earnings were tax- sonal property taxes, and licensel fees, excise or
able npon being retnrned to the United States di- other municipal taxes levied by any municipal ordi-
rectly, or in the case of a snbsidiary, repatriated to nance. In the case of commercial hotels and guest
the U.S. paren!. Dividends paid from a possessions houses, the exemption is limited to 50 percent of
corporation were not eligible for the intercorporate these taxes. Liquidating dividends paid by a tax
dividends received deduction (unless the subsidiary exempt subsidiary to its parent corporation are also
section 931 failed to meet ilie 80 percent and 50 exempt, providing the parent owns 80 percent or
percent of gross income tests in the year in which more of the subsidiary's stock. A U.S. "possessions
the distribution was made and in the preceding tax- corporation" thus could have both a Federal tax-
able year, in which case it lost its possession corpo- free status and be exempt from Puerto Rican taxes.
ration status). On the other hand, since a posses- With one important exception (see discussion of the
sions corporation was considered a domestic corpo- tollgate tax below), these exemptions are still avail-
ration, no recognition of gain or loss was required able to most manufacturing firms operating on the
by its domestic parent on dividends distributed in island.
complete liquidation into the paren!. Like the exemption itself, the criteria for eligibility
A section 931 corporation could participate in for exempt status under the Industrial Incentives Act
the filing of a ,consolidated return in any year in are quite liberal. To be exempt, a firm need only do
which it failed to satisfy the section 931 gross in- one of ilie following: (1) produce or seek to pro-
come requirements or, as was the usual case, in duce on a commercial scale in Puerto Rico any
which it incnrred a loss. Thus, the parent of a sec- manufactured product which was not produced on
tion 931 corporation could avoid taxes in profitable such scale on or before January 2, 1947-ilie year
years and offset losses in unprofitable years. 3 when the first tax exemption law was enacted; (2)
manufacture one or more of 38 designated product
Pnerto Rican Structure Prior to 1976 categories ranging from tin containers to films; (3)
Tax Reform Act lease property devoted to industrial development;
The Puerto Rican Tax system consists of income, ( 4) operate a toUTÍst or commercial hotel (subject
excise, property, estate and gift, and various license to certain conditions); or (5) operate various scien-
taxes-with income and excise taxes providing al- tific and laboratory concerns.
most 80 percent of total tax revenue. The Puerto The lengili of the tax exemption period ranges
Rican corporate income tax is similar to that of the from lOto 30 years, depending on the geographical
United States, except for its rates, depreciation sys- location of ilie firmo In general, the exemption period
tem, and allowance oí special indnstrial incentive increases as one moves away from ilie high indus-
exemptions. 4 trial development zone of San Juan (10 years)
The island's first modern industrial incentives law, toward the industrial development zones on the cen-
enacted in 1947, not on1y provided exemption from tral and southern parts of the main island (15 to
income, property, and municipal taxes, but also 25 years), or toward the neighboring islands of
offered subsidies to new indnstries in the form of Vieques and Culebra (30 years).
outright cash grants to offset startup costs, real Commencement of a firm'sexemption status be-
estate facilities, worker training programs, and low gins with· the star! of business operations. However,
interest loans. Although it was initialIy intended that an exempt firm may also take advantage of several
the tax concessions be phased out by 1962, the options to ilie basic exemption plan in order to in-
Commonwealth fnrther extended the tax incentives crease its profitability. First, the firm may elect to
in 1954 and 1963. Under existing arrangements have its exemption postponed up to 4 years in order
provided by the Industrial Incentives Act of 1963," to defer its tax holiday until its operations become
profitable. This option to defer the exemption, how-
3 Robert S. Holbrook, "A Study Di the Characteristics, Behavior,
and Implications Di 'PossessioDS Corporations' in Puerto Rico," A ever, may be abandoned during this period if the
Report to the Office Di Tax Analysis, U.S. Department of the business notifies the Commonwealth. Another op-
Treasury, October 1, 1977, p. 18.
4 For further discussion see Fuat M. Ardic and Arthur J. Mann, tion provides for the deferral of income tax only.
"Redesigning Puerto Rico's Tax System: An Overview," BulIetin for
International Fiscal Documentation, May 1975, p. 188, and Donald
Furthermore, two types of partial exemptions are
W. Kiefer, Treating Puerto Rico as a State Under Federal Tax and available. The first is open to any firm and provides
Expenditure Programs: A Preliminary Economic Analysis (Washing- for the doubling of the exemption period as a trade-
ton, D.C.: Congressional Research Service, Library of Congress,
September 1977), Report 77-202-E, p. 9. off for reducing the size of the exemption from 100
15 Act 57, Laws of 1963. This discussion is based on infonnation
from (a) Commerce Clearing Rouse, Ine., TapicaI Law Reparts: percent to 50 percen!. Once a firm elects partial ex-
Puerto Rico (Chicago: CCH, 1978) and (b) What You Should emption. that election is irrevocable.
Know About Taxes in Puerto Rico, Derartment of the Treasury,
Cornmonwealth of Puerto Rico, San Juan, 1976. A second type of partial exemption can be granted

by the Governor in cases where it is determined that, viewpoint of limiting a fum's ability to flip in and
due to foreign competition, a firm must perform part out of possessions status, it will have little practical
of its manufacturing pracess outside Puerto Rico. effect on tax planning behavior of a firmo Changing
Under these circumstances, a partial exemption of status under section 931 was usually not practical
60 percent to 70 percent of all exemptions may be since the corporation was required to pay U.S. in-
granted. The 70-percent factor applies when 50 per- come taxes on its current manufacturing and invest-
cent or moreof the firm's total cost of labor involved ment income exempt for Puerto Rican income taxes
in production of the exempt praduct is attributable in the year it did not meet the requirements of sec- .
to Puerto Rico. The partial exemption of 60 percent tion 931."
is granted if it is established that the Puerto Rican A significant difference between sections 931 and
share of the firm's labor cost is between 40 percent 936 is that a parent of a section 931 firm was gen-
and 49 percent total labor cost. erally ineligible for the intercorporate clividends re-
By statute, these exemptions may be revoked by ceived deduction. A section 936 fum can distribute
the Governor under a variety of conditions which its dividends to its U.S. parent at any time and re-
define the failure of the firm to comply with its legal ceive: (a) 100-percent clividends received credit if
obligations. In practice, however, revocation has 80 percent or more of the firm is owned by a U .S.
been rareo corporate shareholder, or (b) an 85-percent credit.
Further, these dividends received deductions are
Chan~es in Corporate Taxation Resulting available for dividends paid out of both current sec-
From 1976 Tax Reform Act tion 936 earnings and accumulated section 931 earn-
ings. However, unlike section 931, the new law pro-
Treatment ot Possessions Corporations.-The Tax hibits a parent corporation from taking a foreign tax
Reform Act of 1976 replaced IRS Code Se~tion 931 credit or deduction from section 936 income on taxes
language for corporations with a new section 936, levied by a foreign country or possession (e.g., a
which changes several features of the Federal tax Puerto Rican levied tax) on section 936 income. The
exemption provided t-:> possessions corporations. foreign tax credit is available, however, for taxes
The sections 931 and 936 gross income require- paid on income ineligible for section 936 status.
ments are the same. However, the mechanism for tax Major differences between sections 931 and 936
abatement is changed. Under section 931, qualify- are summarized in table 1.
ing gross income (non-U.S. source) was simply ex- Puerto Rican Tollgate Tax.-Section 936 Federal
c1uded for tax purposes; under section 936, there is tax treatment of possessions corporations not only
an automatic tax credit. Although a section 936 firm continues a tax holiday for these possessions corpo-
is technically a fully taxable entity, it is permitted a rations on both nonrepatriated earnings and liqui-
tax credit equal to the U.S. tax due on its section dated dividends, but also provides a tax-free status
936 incpme, i.e., on income fram the active trade or on clividend repatriations made at any time during
business in a possession or from qualified possessions its life.
source investment. Income must be derived fram tbe The Commonwealth's reaction to these tax ad-
investment of trade or business income from tbe vantages was to enact a basic tax of 10 percent on
same possession. the amount of Puerto Rican derived earnings re-
By clearly requiring that the qualified investment patriated to mainland parents. 7 This 10-percent tax
funds be derived fram the same possession in which can be reduced to less tban 5 percent (or to zera in
the section 936 does business, the practice of sec- the case of complete liquidation) if the section 936
tion 931 firms receiving tax exempt income and firm's investment portfolio meets certain conditions.
investment outside Pnerto Rico is eliminated. For The major features of the tollgate tax statute are
example, this new definition precludes the practice as follows:
of section 931 firms using financial intermediaries in
Guam, a U .S. possession, as a conduit for Eurodollar • A 10-percent tax on dividends paid by a Puerto
investments. Rican firm to its nonresident parent (e.g., a firm
Once a corporation elects "possessions status" organized in the United States which does not
under section 936, it must maintain that status for 6 Barry A. Woods and Michael Abrutgh, "How tbe TRA Changes
Tax Climate for Using PossessioDs and WHTC Corporations,"
10 years, with revocation possible only with the con- Journal Di Taxation, February 1977, p. 96.
sent of the U.S. Secretary of the Treasury. Unlike a 7 Prior to the 1976 Tax Reform Act and Puerto Rko's enactment of
the tollgate tax (Acts Nos. 95 and 96, JUDe 1, 1976), the Conunon-
section 931 firm, the section 936 firm cannot change wealth levied a 15-percent tax on dividends paid by Puerto Rican
its filing status in order to become eligible for the shipping, hotel, or manufacturing firms to nonresident parents. How-
ever, that 15-percent tax was applied only if the parent could not c1aim
clividends received deduction and participate in a a foreign tax credit for the Cornrnonwealth tax. As a result, the
consolidated return with its parent. Although this effective Puerto Rican rate was zero. The lO-percent toll-gate enacted
with the passage of the Tax Reforrn Act is applicable even when the
new treatment has a theoretical appeal from the nonresident parent is demed a foreign tax credit.

Table 1.-Comparison oi Statutory Provisions Under Internal Revenue Code.Sections 931 and 936

l. Possessions Corporation (DefinitionJ Section 931 Section 936

A. Domestic Corporation (A corporation erganized under the laws A. Same as for Seetion 931
of one of the 50 States, D.C., or the Federal Government) must
meet two gross income tests.
1. 80 percent or more of gross income fer a 3~year period im-
mediately preceding the close of the taxable year or applicable
part thereof was derived from sources within a U.S. possession.
2. 50 percent of such corporate gross income must have been
denved from the "active conduet of a trade or business within
a possession of the United Státes."
B. DISC: A eorporation whieh is a DISC, former DISC, or holds B. Same as for Section 931
stock in a DISC or former DISC ls ineligible.
c. Consolidated Return: A fum conId file a eonsolidated return with c. Election: Once a corporation elects "possessions status," that
its parent even if: election must remain in effect for 10 years. Revocation is possible
with the consent oí the Secretary of the Treasury. A possessions
1. it operated at a 10ss in tbe returo year. corporation may not flip in and out oí Section 936 status to file a
consolidated return.
D. Dividends Deduction: The parent to be eligible for a dividends
received deduction resuIted from:
1. a failure to qualify of a Section 931 for 2 years.

Il. U.S. Tax Treatment 01 Possessions Corporations

General: Income exclusion gross ineome not received in the United General: Possession Tax Credit Mechanism
States was excluded from gross income for eorporate tax purposes
if the 80 pereent and 50 percent tests were meto A. EIecting domestie corporations with Section 936 income (meeting
the 80~percent and 5Q-percent requirements) are not fuTIy taxable
B. However, Section 936 corporations are pei:mitted an automatic tax
credit equal to tax due on their Section 936 income, i.e., from tax.
on earnings.
1. from sources without the United States from the active conduct
of a trade or business witbin a possession and,
2. from "qualified possession source investment income." "Quali-
fied possessions source investment income" is groS5 income
(minus allocable deductions) attributable to the investment in
a possession for use therein. Possessions source investment
income wmch fails to satisfy the "for use therein" condition, is
subiect to U.S. tax and is taken into account ior purposes of
determining eligibility for the gross income requirement.
C. The possessions tax credit cannot be taken against taxes relating
to the minimum tax, accumulated earnings tax, or the personal
holding company tax, war los5 recoveries of foreign expropriation
10sses-taxes imposed separate from the corporate normal tax and

lII. Repatriation 01 Earnings

A. Section 931 dividends ineligible for the dividends received dedue- A. !ntercorporate dividends can be distributed by a possessions cor-
tion applied to dividends received by a U.S. (e.g., parent) corpo~ poration to its parent and receive:
1. l00~percent dividends received deduction ü the Section 936 is
80 pereent or more owned (e.g., wholly owned subsidiary) by
U .S. corporate shareholder
2. 85 percent otherwise.
B. Any intercorporate dividends received from a Section 931 were B. This intercorporate dividends received deduction is available for
subject to the full U.S. eorporate tax. However, any Puerto Rico dividend distributions paid out of both
tax paid by the sUbsidiary for the (Sec. 901, 902) foreign tax credit
was aIlowable. 1. current (Sec. 936) earnings
2. accumuIated Section 931 earnings
C. No foreign tax credit or deduction may be taken by a parent on
taxes levied by a foreign country or possession (e.g., tollgate tax)

IV. Liquidation-Sections 931, 936

Liquidation distributions from and earnings of Sections 936 or 931 firms to the parent are free of U.S. tax under the nonrecognition provisions
by which liquldating distriblltions by a sllbsidiary to its parent are tax free.

carry on an active business or trade with the legal issues arese regarding the ability of the Com-
islands) on dividends paid from industrial de- monwealth to tax a firm which had both foreign and
velopment income (income exempt frem lhe Puerto Rican source income and which, ostensibly,
Puerto Rico iucome tax). This 10-percent rate paid sorne of its divideuds out of non-Puerto Rican
also applies to dividends paid from nOnexempt income. Accordingly, the CommonweaIth Govern-
incomes generated by hotels, shipping, and man-
ufacturing operations. ment issued Administrative Declaration 77-1 in De-
cember 1977, which reduced the effective tolIgate
• Eliminatiou of the tax exemption on dividends tax rate on dividends paid by possessions corpora-
paid frem industrial development income to tions to their U.S. parents not engaged in trade or
resident foreign corporations (i.e., parent com- business in Puerto Rico from a maximum 10 per-
pany actively engaged in trade or busiuess iu cent, 7 percent to 5 percent, or 3.5 percent. In the
Puerto Rico). These foreign resident firms are, case of lhe U.S. parent activeIy engaged in trade or
however, permitted an 85-percent intercorpo-
rate dividends received deduction. As a result, business in the island, the maximum tax can be re-
the maximum rate applied to lhese firms is 6.75 duced frem 6.75 percent to 3.375 percent.
percent (45 percent X 15 percent). Under the terms of this ruling, a section 936 firm
with foreign source income may declare that up to
• A tax rate of 7 percent is applied to dividends haIf its repatriated dividends to the U.S. parent are
paid to a nonresident parent if: (a) dividends
are paid out of accumulated section 931 funds frem foreign sources and, therefore, free of the
(industrial development income accumulated Puerto Rican tolIgate. That is, a section 936 may
prior to October 1, 1976) so that (i) no more repatriate accumulated earnings derived from non-
than 25 percent of such dividends are paid dur- Puerto Rican sources if it declares a dividend of an
ing the year and (ii) an equal amount of funds identical amount frem sources within Puerto Rico.
are invested in Puerto Rico during the taxable For example, if a firm has $5 million in foreign
year in which the distribution is made; OY (b) earnings (e.g., EurodolIar interest) and $15 million
the dividends are paid out section 936 funds to in Puerto Rican sources, it may declare up to $10
industrial development income paid to resident million in repatriated dividends to its nonresident
or nonresident parent accumulated after Sep- parent, and alIocate haIf of that repatriated amount
tember 30, 1976, so that (i) lhe distribution
does not exceed 75 percent total industrial de- to the foreign source income. The resuIt: The tolI-
velopment income accumulated during the year gate tax is levied on only the Puerto Rican half of lhe
and that (ii) at least 25 percent of the total $10 million. By qualifying under terms of the "nor-
industrial development income shalI be invested mal" 7 percent or zere tax rates, and/or the 3 per-
in Puerto Rico for a period in excess of 8 years. cent investment credit, the effective rate on the total
repatriation can be reduced below 5 percent.
• A manufacturer's investment tax credit against
tolIgate tax equal to 3 percent. A firm may also
take a manufacturer's investment tax credit Changes in the Puerto Rican Industrial
against the tolIgate tax equal to 3 percent of the Incentives Program
investment made by a U.S. subsidiary in its ac-
quisition, construction, and extension of build- In June 1978, the Romero-Barcelo Administration
ings and other structures used in manufacturing enacted a series of changes in the Puerto Rican tax
in excess of the subsidiary's investment held on exemption program into law. The new program pro-
March 31, 1977, or after its second year of tax vides for a partíal, rather lhan fulI income and prop-
exemption. This credit may be carried over to erty tax exemption, a modest employment incentive
folIowing taxable years. program, and a tax conversion system designed to
'. FulI exemption on dividends paid frem indus- encourage the change from the "old" to the "new"
trial development income derived frem interest incentives programo The major reform proposals are
received fram the folIowing Puerto Rican in- surnmarized below.
vestments (hereafter referred to as section "2j" 1. Existing Grants Continued.-Firms operating
investments): (a) obligations of the Common-
wealth or any of its instrumentalities or political under earlier tax exemption grants-or which have
subdivisions, (b) mortgages secured by the applications pending under current law-are guaran-
Housing Bank and Finance Agency of Puerto teed that existing arrangements will be maintained,
Rico (acquired after March 31, 1977), (c) unless voluntary conversion to the new system is
loans and other securities with mortgage secur- made.
ity granted by any Commonwealth or local pen- 2. Partial Exemption Income and Property Taxes.
sion or retirement plan (acquired after March
31, 1977). -New grants of tax exemption will vary by location
and time periods. The system will pro vide exemp-
Once these tolIgate tax rules were established, tions frem corporate income and property taxes be-

ginning at higher percentages during the early years earnings: (a) paying 10 percent tollgate tax on
of operation, and decreasing according to the num- earnings repatriated at any time; or (b) paying a
ber of years applicable in the geographical zone in tolIgate tax reduced to 5 percent if the corporation
which the firm has been established. The exemption invests 50 percent of any given year's earnings in
equals 90 percent of corporate taxes in the first 5 designated investments (the "2j" financial invest-
years, and 75 percent for the fifth through tenth years ments noted aboye and/or new plant and equipment,
for all island locations. After the first 10 years, the local bank saving certificates and construction loans),
exemption vanishes in the "high deve1opment" San and then repatriate the remaining 50 percent (or
Juan zone, and declines in the remaining zones (see amounts up to 50 percent) in equal amounts over a
table 2). 5-year periodo At the beginning of the sixth year,
firms can withdraw the locally invested 50 percent
Table 2.-Pereentage of Total Exemption by of earnings at the reduced 5 percent tollgate charge.
Geographical Location
For the first time, Puerto Rican tax would be
Time period (years) imposed upon amounts distributed in liquidation of
1-5 6-10 11-15 15-20 20-25
a subsidiary. The tax would be 4 percent on all re-
Zone years years years years years patriated earnings and cannot be taken by the U.S.
High development _____________ 90 75 parent as a tax credit (under U.S. tax laws) against
Interrnediate development ____ 90 75 65 its U.S. corporate net income tax.
Low development __ ~ __________ 90 75 65 55
Viques and Culebra ________ 90 75 65 55 50 7. Export and Service Industries.-Export ori-
Source: Government of Puerto Rico, Industrial Incentive Commit. ented service firms, (e.g., scientific research, consult-
tee, Economic Analysis 01 the lndustridl Incentive Program Di Puerto ing, industrial repair, appliance repair, mail order
Rico, Administration fOI Economic Development, Office of EcoDomic
Studies, February 1978, p. 328. operations), will receive 10, 15, or 20 years of 50
percent tax exemption from property and corporate
Once the initial grant period expires, every manu- taxes depending on their geographical location, pro-
facturer may apply for 10 years of additional tax ex- viding that (a) the services are supplied outside
emption based on the following geographical condi- Puerto Rico, (b) 80 percent of the employees are
tions: Puerto Rican residents, and (c) 80 percent of the
invoice value is performed in Puerto Rico.
Table '.-Pereentage of Extension Exemption by 8. Apparel, Leather, and Textile Firms.-A spe-
GeograPhieal Location
cial additional 5-year exemption of 90 percent is
Time period (years) to be granted to firms in leather, apparel, and textile
1-5 5-10
industries which have plants with tax exemptions
Zone years years expiring during the next 5 years.
High development ~_________ 50 35 9. Plant Expansions.-Present law generally re-
Intermediate development _________ 50 35
Low development ___._._.. __._ 50 45 .quires that every exempt expansion be operated as a
Viques and Culebra .... _ ... _ .. ___ 50 50 separate industrial unit without substantial use of
Source: Government of Puerto Rico, Industrial Incentive Com-
common facilities, unless the investment in the origi-
mittee, Economic Analysis 01 the Industrial Incentives Program 01 nal unit is at least $2.5 million and the investment in
Puerto Rico, Administration for Economic Development, Office of
Economic Studies, February 1978, p. 334. expansion is at least $1.0 million. The proposed law
would eliminate the dollar investment conditions and
3. Municipal and Excise Taxes.-Complete ex- permit the Governor, at his discretion to issue a new
emption will continue for municipal license fees and exemption to a totally integrated expansion in any
taxes and for excise taxes for the duration of the case. This would permit the allocation of the firm's
grant. profits to the expansion. 8
4. Specific Dollar Exemption.-Corporations earn- 10. Conversion to New System.-Exempt manu-
ing less than $500,000 may exclude the first facturing businesses operating under existing grants
$100,000 of industrial development income from many elect to convert to the new industrial incen-
taxation. tives programo Those firms converting will continue
5. Payroll Deduction.-All corporations, includ- receiving full exemption from property and license
ing those which are eligible for but do no! claim the taxes. But they will be subject to a low rate net in-
$100,000 exemption, may deduct an extra amount come tax, with maximum effective rates ranging be-
equal to 5 percent of production payroll costs from tween 3 percent and 12 percent, depending on the
taxable industrial development income. This payroll number of years remaining in the original grant. See
deduction cannot exceed 50 percent of such income. table 4.
6. Tollgate Tax.-The new system will provide the 8 Angel L. Castro, "Tax Bill and the Manufacturer," Caribbean
following options for dealing with repatriation of Business News, May 11, 1978.

Table 4.-Maximum Effec.tive Tax Hates Under at 50 percent of income, property, and municipal
Proposed Conversion license taxes. For !he second 5 years, !he exemption
varíes by geographical zone according to the fol-
Exemption from Maximum effective lowing schedule:
Years of exemption re- Income tax rate on totalincome
maining at conversion (percentage) (percentage) Percentage
1-4 ----.. ---.----.------------- 73.3 12.0
4-8 -----._----.---------.------ 77.7 10.5 High Development . . . . . . . . . .. 35
8-12 ..--------...------....:.....---- 85.5 7.5 Intermediate DeveIopment . . . .. 40
12-16 -------------~---.-.- 90.0 4.5
16-20 .-------.---------.-- 91.1 4.0 Low Industrial Development . .. 45
More tban 20 _______ _ 93.3 3.0 Vieques and Culebra . . . . . . . .. 50
Source: Compiled from data in: Government of Puerto Rico, Indus-
trial Incentive Committee, Economic Analysis 01 the Industrial Incen-
The applicable tax rate on the taxable portion is
tive Program Di Puerto Rico, Administration for Economic Develop- !he tax rate in effect on the date the Governor signs
ment, Office of Economic Studies (Feb. 1978).
the grant decree. Thus, under existing statutes, the
maximum effective corporate tax rate would range
The objective of this section in the amended nA from about 22 percent during !he first 5 years to
would appear to be the desire to avert the possible nearly 30 percent during the second 5 years, the
cIosure of firms reaching the end of their exemptions rate depending on the development zone. It should
under the earlier nA. By extending the time period be stressed, however, !hat these are the theoretical
of the exemption, albeit at a lower exemption level, maximum effective rates on taxable industrial de-
the Puerto Rican authorities are aware of !he need velopment receipts. AII firms wiIl be able to reduce
to expand the potential taxable base and the impor- their taxes as a result of special exemptions, deduc-
tance of bringing the existing investments within the tions, andjor credits provided eIsewhere in !he tax
strncture of the new nA. statutes.
Firms with accumulated profits may repátriate
those earnings to their U.S. parent at reduced toIlgate
tax of 4 percent provided that: APPRAISAL OF TAX EXEMPTlON
• Pre-January 1, 1973, earnings be distributed PROGRAMS IN PUERTO RICO
equaIly within 2 years, and
Limitations of CommonweaIth Tax Policy
• One-haIf (50 percent) of earnings accumulated
from 1973 through 1976 be placed in desig- The Federal tax exemption aIlows afirm to estab-
nated (2j) investments, or in property devoted lish its productive activities in Puerto Rico exempt
to industrial development for aperiod of 5 from Federal'taxation. 9 An exemption under Puerto
years. The remaining 50 percent must be dis-
tributed in equal annual instaIlments. (The first Rican corporate taxation parallels the Federal ex-
50percent initiaIly invested in 2j can be fuIly emption. Although the Commonwealth exemption
repatriated in the fifth year at 4 percent.) plays. a role in attracting investors to the island, its
importance for attracting firms to Puerto Rico has a
There is no tax on Iiquidating dividend distribu- cost for the island.
tions, and the toIlgate which is paid can be indefi- Proponents of tax incentive systems asserts that:
nitely carried over as a tax credit against 50 percent (a) jurisdictions failing tb provide incentives wiII
of the taxes payable per year on industrial develop- lose business to competing areas, and (b) incen-
ment income. Thus, the tax credit provides a mecha- tives encourage expansion of firms beyond !hat
nism for companies maintaining Puerto Rican opera- which would otherwise occur. Certainly, a particular
tions to distribute aII pre-1977 earnings tax free. firm with specific marginal investments in question
Firms with dividend distributions of current (post- may react more favorably to a tax incentive. 10 How-
January 1, 1977) earnings to a U.S. or foreign cor- ever, taxes constitute only one of several business
porate shareholder wiII be subject to the basic 10- costs, and a fairIy sizable tax benefit is required to
percent toIlgate on aIl such distributions. However, affect !he investment choices of most companies. In
this lO-percent tax can be reduced to 5 percent if at this context, it is difficult to accurately assess tbe
least 50 percent of the industrial development income effects of Commonwealtb tax exemptions in attract-
is invested in property devoted to industrial develop- ing investors to Puerto Rico.
ment (real property and machinery and equipment
9 The 40 pereent represents the U.S. Treasury's estimate of what the
used by an exempt business) or qualified "2j" finan- effective rate of taxation would have been in the absence of section 931
cial investments. or 936. Data report on The Possessions Corporation System DI Taxa-
tion, Office of Tax Paliey, U.S. Treasuty Department, June 1978, p. 39.
Grantees which convert to the new system have a 10 Thomas Vasquez and Charles 'V\', DeSeve, "State/Local Taxes and
vested right to extend exemptions for a 10-year pe- Jurisdictional Shifts in Corporate BUsiness Activity: The Complica-
tiODS of Measurement:' Natfonal Tax Joumal. September 1977. p.
riod. For the first 5 years, the exemption would be 285-297.

The significance of a tax exemption incentive as to company. But it is possible to draw sorne conc1u-
a business atlraction device is largely determined by sions regarding general corporate tax planning in
what lhe effective rate would be in the absence of a Puerto Rico.
full or partial exemption. For example, in mainland General lntercorporate Allocation of Costs and
southern States, the effective corporate income tax lncome.-Businesses can maximize profits by utiliz-
rates after Federal taxes are between 2 percent and ing various intracompany transfer price techniques;
3 percent. When that is added to the Federal tax, that is, by allocating the costs of certain goods,
the total effective rate on business activity is prob- services, and intangibles (e.g., trademarks and pat-
ably about 40 percent. l l Thus, it is not surprising ents) among subsidiaries. This may be the case with
that most research on the role of various U.S. State possessions corporations in Puerto Rico which have
and local tax concessions concludes that State and U .S. parent companies subject to maximum taxes
local taxes-and therefore reduction in these taxes (Federal, State, and local) on 48 percent to 50 per-
-play a very minor role in business location and cent of profits.
expansion decisions. 12 There are various ways to shift profits subject to
However, when focusing on the Puerto Rican tax high mainland taxes to island subsidiaries which pay
incentive program, one is then talking about reduc- few or no taxes. However, most of the melhods that
ing taxes from a total effective tax rate of 40 percent are possible would be considered not allowable
to zero. 13 Under these circumstances, it is not difficult within the scope of Federal tax law. These methods
to conclude, as many studies have, that the Puerto include:
Rican tax exemption is a significant cost reduction
factor, in conjunction with the Federal statutes. • Providing raw materials and supplies to the
subsidiary at relatively low prices;
The Tax Incentive and Business Firms' • Paying high prices for the subsidiary's exports;
Behavior • Incurring direct costs (e.g., purchases of sup-
The combination of the Federal definition regard- plies, legal expenses) on behalf of the subsidi-
ing what constitutes "qualified possession source in- ary, and
vestment income" and the Puerto Rican Industrial • Transferring intangibles to the subsidiary with
Incentives Act (and, since 1976, the tollgate tax) the subsidiary inc1uding the cost of the patents'
places a premium on the section 936 firm's ability or trademarks' value in export charges to the
to plan its production and investment activities so paren!.
as to minimize or perhaps eliminate, its tax costs.
These tax planning decisions, in turn, influence the The U.S. Treasury generally requires that intra-
firm's economic behavior with respect to its manage- company transactions be priced or charged as if they
ment and financial and capital investment decisions were made on an arms-Iength basis. '6 The idea is to
-behavior which significantly aflects the Puerto view the parent and its subsidiaries as separate or
Rican economy.14 independent entities. But because benchmark data
to estimate the arms-Iength price are not readily
Corporate decisions on investments, on repatria- available, it is often difficult to find independent
tion of subsidiaries' profits,'5 and on intercorporate nonvertically integrated operations which could give
allocation of costs vary considerably from company comparable pricing data on, for example, specialized
11 The Federal estimate of 40 percent is from the Office of Tax
equipment sold from a manufacturing subsidiary to
Anah-ses, U.S. Treasury Department, 1978. State corporation income another manufacturer or distributor in the multi-
tax rates fOI jobs in 1976 as provided in U.S. Advisory Cornmission on
Intergovernmental Relations, Significant Features oi Fiscal Federalism, corporate chain. Moreover, atlempts to estimate the
1976-77, Report M-HO, Vol II (ACIR: Washington, D.C. 1977) arms-Iength price ignores the economic reality that
table 113.
12 For a recent detailed review of the literature see Stephen S. multicorporate entities can reduce their costs through
Pullee and Joan E. Towles, "Impact of Intraurban Tax Differentials the advantages of economies of scale, central man-
on Business and Residential Location in the Washington Metropolitan
Atea," A technical paper prepared for the Distdet of Columbia Tax agement, advertising, reduced transactions costs,
Revision Commission, 1978; and the Report of the Committee on
State Ineome and Business Taxation, Proceedings 01 the Seventieth quantity discount purchases, and access to capital
Annual Conlerence on Taxation, National Tax Association, Tax In- markets.
stitute of America, 1977.
1.1 Holbrook, "A Study of the Characteristics," p. 63. In response to problems of these types, the U.S.
u See Zohan M. Mihaly, "Puerto Rico: Repatriation of Puerto
Rican Earnings," Tax Management lnternational Journal, December
Treasury Department has issued intrafirm pricing
1976, pp. 3-21; Barry A. Woods, Puerto Rican 'Toll Tax': A Private guidelines and has sorne times fallen back on a uni-
Practitioner's View," Tax Management lntemational Joumal, Octoher
1976, pp. 7-10, Woods and Abrutyn, "How the TRA Changes Tax 16 For a detailed discussion of tbis issue, see Jerome B. Hellerstein.
Climate," and Barry Klingman, "The '76 Act Hits the Tropics: The "The Unitary Business PrincipIe and Multieorporate Enterprises: An
Improved Investment Climate in Puerto Rico," The Tax Adviser, Examination of the Majar Cantroversies," The Tax Executive, JuIy
January 1977, pp. 12-17. 1975, pp. 313-329; "MultinationaI Corporatians and Income Alloca-
15 A detailed discussion is provided by Mihaly, "Puerto Rico: Re- tion Under Section 482 of the Internal Revenue Cade," Harvard Law
patriation of Puerto Rican Earnings," Ibid., pp. 7-18. Review, vol. 89, pp. 1202, 1238.

tary accounting approach. In reality, however, the served two purposes. First, since a firrn's initial years
system is so complex, and its enforcement so expen- . are characterized by startnp costs, giving low or
sive, that firms can usuaIly continue to use transfer negative profits, there is no practical reason to begin
prices in order to shift profits among the members exempt status in the early years. Second, these nor-
of the multicorporate whole. mal startup operating losses of the subsidiary could
AIthough the U.S. Treasury and the taxpayer may be used to offset non-Puerto Rican source profits of
both lose as a resuIt, there are benefits to Puerto the paren!.
Rico. Since income and cost aIlocations tend to shift Once the firm becomes profitable, it then would
profits to the low tax area, the profits of Puerto qnalify for section 931 and Commonwealth tax ex-
Rican based possessions corporations are increased. emption status. However, since any repatriated divi-
The CommonweaIth can transfer sorne of these arti- dends prior to liquidation were subject to U.S. tax,
fically higher profits to its treasury through corporate the firm would accumulate its profits and look for
profits taxation. financial investment outlets which would qualify as
A commonwealth profits tax would reduce profit industrial deve10pment income.
shifting to island firms. Although lhere is no quanti- Four outlets received the bulk of the accumulated
tative evidence available on the size of these profit profits-U.S. and Puerto Rican municipal bonds,
shifts, the decline in lhe profit component is no! and investments in Gnaro, Europe, and Canada:
Iikely to be great for most possessions corporations.
This is because the corporate (Federal, State, and '. Municipals.-Since municipal bonds are not
local taxes) tax wedge between Puerto Rico and the considered part of gross income for tax pur-
United States would stilI be substantiaI. For example, poses, a firm could purchase these and yet not
even if the Commonwealth were to adopt a 20-per- have to consider lhe interest received when
cent corporate profits tax rate, the average effective determining the section 931 gross income re-
tax rate would still be less than half that of the aver- quirements.
age Federal plus State and local mainland rates. Such
• Guam Investments.-Since Guam is a U.S.
a gap should be a sufficient incentive to continue the
possession, the return on financial investments
bulk of the profit shifting-a conclusion that may
in Guam banks could satisfy the section 931
be warranted in view of evidence that such transfer
rule that 80 percent or more of the firm's gross
pricing occurs even among the 50 U.S. State jurisdic-
income be derived from sources "within a pos-
tions which have much smaIler interjurisdictional
tax differentialsY
Behavior of Finns Operating Under Section 931.- • Canadian and European Investments.-Cana-
Prior to the Tax Reforrn Act of 1976, the Federal tax dian and European source investment incomes
law appears to have played a significant role in the were not included as possessions source income.
fums' tax planning decisions. Failure to foIlow the However, since such income could be exempt
section 931 source of income and dividend repatria- from Federal and Puerto Rican income taxa-
tion rules meant taxation at the full U .S. corporate tion, Europe and Canada were attractive invest-
rates. Even though the Commonwealth had a nomi- ment areas as long as the income generated
nal l5-percent pickup income tax on repatriation of did not exceed 20 percent of gross income.
nonliquidating dividends,'8 it was of only minor im-
portallce in financial decisions (especially since it Income generated from Puerto Rican sources
quali1ied for the foreign tax credit). would count toward the 80-percent gross income
The domestic U.S. parent organized a subsidiary, requirement. Due to the Iimited size of the island's
genera!1y wholIy owned, which would qualify as both financial market, however, most possessions cor-
a section 931 and a grantee of the Puerto Rican tax porations used one of the aboye outIets.
exemption. If the subsidiary had losses during its Once lhe period of tax exemption ended, the last
startup or did not meet the 80 percent and 50 per- step in the tax planning process was often to liqui-
cent tests, it would then file a consolidated return date the firm, and repatriate accumulated earnings
with its parent and defer its application for tax to the parent company on a tax-free basis. This
exempt status dnring the startup periodo Under the Iiquidation step was greatIy encouraged by lhe "tax
terrns of the Industrial Incentives Act, this period shock" which would occur if a firrn were to keep
could last up to 4 years without resulting in dis- its exempt operations open after the expiration of lhe
qualifying the firm from benefits during subsequent exempt periodo Profits from the firrn's exempt plant
years under the ac!. would then become subject to a 45-percent maximum
The consolidated return tax exemption deferral corporate net income tax rateo
u Por a discussion, see Hellerstein, ''The Unitary Business PrincipIe." Firms could minimize the amount of this shock,
18 See faotnote 7. however, by operating more than one tax exempt

plant, and, upon expiration of the exemption in the specifically directed at providing a barrier to repatri-
first plant, transfer, with Cornmonwealth approval, ation of accumulated earnings.'9
its operations to another plant which still held ex-
Arguments for financial investment outlet tax
empt status. Other possibilities included negotiating
concessions appear to be essentially based on four
with the Cornmonwealth for a new exemption by points:
making technieal adjustments to the first plant's
operations, or running the plant on a taxable basis, • That section 936 tax-free repatriations would
but with less profit allocated to it-an outcome have generated a large outflow of earnings;
whieh could be accomplished by production adjust- • That by making concessions for certain invest-
ments in the firm's interplant operations, or through ments, local interest rates will decline;
transfer pricing. • That Puerto Rieo's capital short economy needs
these funds; and
Behavior of Finns Operating Under Section 936.
-In the post-1976 Tax Reform Act period, Puerto • That there are insuflicient Puerto Rieau invest-
ment opportunities to absorb an adequate por-
Rican tax considerations have taken on greater im-
tion of the section 936 funds.
portance. Although newly defined "qualified pos-
session source investment income" places more re- However, both a priori reasoning and available
strietions on portfolio investments than under section evidence on possession corporation's financial be-
931, for most subsidiaries (80 ,percent or more havior throw sorne doubt on these assumptions.
owned by U.S. shareholders) repatriation of past ac- Contrary arguments can be made to each of the
cumulated earnings as well as current earnings is foregoing points:
U.S. tax free. However, the Puerto Rican tollgate • Possession corporations were already investing
tax, in part for accounting reasons, has become an most earnings outside of Puerto Rico;
obstacle to the repatriation oí accumulated sections • Interest rates that the Commonwealth Govern-
931 and 936 eamings. ment must pay on its obligations (the "2j"
With the enactment of the tollgate, possessions investments) should decrease slightly, but inter-
corporations were faced with the necessity to set up est rates in general will not necessarily fallo In
a tax reserve account for the purpose of paying the
fact, one could hypothesize that by being able
tollgate tax on all accumulated earnings. Even if a to ofIer a relatively lower interest rate on its
firm wants to repatriate only a single dollar of ac-
bonds, sorne private financial investment which
cumulated eamings, it is required to book an entire would otherwise be attractive, will be bypassed
tollgate reserve account for all its prior years' eam-
as the possessions corporation opts for yield
ings. The result is to lower the earnings per share in and security;
the firm's stockholder reports.
One way out of this booking requirement is for • Concern about being short of capital seems to
the exempt firm to declare that they will wait until confuse real investment with portfolio invest-
liquidation to bring the accumulated eamings home men!. The capital markets between Puerto Rico
tax free. However, most accountants feel that such and the U.S. mainland are well developed.
a declaration would create a credibility gap between Mainland banks are located on the island, and
the subsidiary, its accountants, and the parent cor- there are free flows of capital which can in-
poration. The practical result is that possessions crease in response to higher rates of return on
corporations are not repatriating these accumulated investments;
eamings. Rather, they are searching for investment • Puerto Rieo's ability to provide investment op-
outlets whieh will warehouse the accumulated earn- portunities is not suflicient to utilize the billions
iugs uutil a fiual, complete liquidation is carried out, of dollars of accumulated retained earnings. 20
or uutil firms are successful in their political efIorts la Pedro Nicot Santana, uThe New Puerto Rican 'Toll Tax': The
to have the Commonwealth ease tollgate tax rules. Government's View," Tax Management lnternational JoumaI October
1976, p. 5.
Ou the other hand, repatriation of current earnings 20 Estimates oí the total amount of accumulated retained earnings

may be taking place in at least small amounts. in mid-1977 by possessions corporations range between $5 and $6 bU-
llan. with an annua! increment rate oí more than $1 billion. Accord-
One of the features of both the current tax exemp- ing a recent study done for ,fue U.S. Treasury (Holbrook, "A
tion system and the newly proposed system of the Study of the Characteristics"). section 936 funds are absorbing a Iarge
amount of Puerto Rican securities. To increase the capacity of local
Romero Barcelo Administration is the ability of a investment for such funds, the Cornmonwealth has established, 11nder
the Government Development Bank, a new agency. The Authority Por
possessions corporation to reduce the amount of Financing of Industrial, CommerciaI and Environmental Central Facil·
Cornmonwealth tax by investing in certain kinds of ities (AFICA), which is set up to help finance the construction of
industrial facilities.
financial obligations-primarily Puerto Rican Gov- To date, most 936 funds have been deposited in Chase Manhattan
ernment bonds. Indeed, one purpose of the Com- or Citibank, or invested. in U.S. municipal bonds and stocks. Banco
Popular and Banco de Ponee, the only local banks with 936 money,
monwealth's enactment of the tollgate in 1976 was have less than one·half a billion of 936 funds together.

Empírica! Evidence 01 Firms' Tax Planning Be- been made, and (b) if the total generation of local
havior.-Available empirical evidence regarding the income and spending of these investrnents causes the
nature of possessions corporations supports the tax tax base to rise more than enough to ofiset the
planning behavior ~utlined aboye. Alt~ough s~me potential tax loss due to the exemptions.
possessions corporatlOns operate on the lsland W1th- Robert Dennis and Robert Rafuse adopted a
out Commonwealth tax exempt status, they are in strategy of computing the minimum percentage of
the nonmanufacturing sectors of trade, merchandise real net investment which would have had to occur
stores, and nonbank financial institutions. Manufac- during the decade of tbe 1960's as a result of exemp-
turing possessions corporations are usually tax ex- tion programs so as to generate net additions to the
empt.2' Puerto Rican budget.2 3 The higher that percentage,
A recent study by Fomento examines the planning tbe greater the likelihood that the exemption pro-
behavior of bu&messes which have received tax gram had a net negative impact on budget receipts,
exempt status, regardless of whether or not they i.e., the revenue cost due to the exemption would
operated as possessions corporations.2 2 The total be greater than tbe increase to total Commonwealth
number of firms which have received tax exemption budget revenues contributed by the exempt firms.
grants under the 1948, 1953, and 1963 Industrial For example, had the data shown that of the total
Incentives Acts were compared with current tax real investrnent in Puerto Rico, 90 percent would
rolls. The resulting data show that 683 tax exempt have to be generated by the exemption just to break
decrees were given to manufacturing firms; only 59 even on revenues, then it could be reasonably con-
of these firms (9 percent) were operating nonexempt eluded tbat the exemption program was a net drain
in 1977. The record under the 1953 law is better- on the treasury.
219 of 1,148 originally exempt firms (19 percent) In order to estimate the actual break-even point,
are now operating as taxpayers. Of the 2,735,decrees Dennis and Rafuse made several necessary assump-
granted under the existing Industrial Incentives Act, tions as to the relationship of various tax revenue
on1y 28 are listed as operating as taxpaying firms. sources to net income generated in Puerto Rico and
Pos&Íble explanations for these numbers range then coneluded that only 26 percent of the net
from the fact that some businesses will inevitably investment between 1959-60 and 1969-70 would
faíl, to the end of exemption period tax shock efiect, have to be attributable to the exemption program in
and the fact that by the time the exemption expires, order to reach the conelusion tbat the revenue costs
a firm simply no longer finds relative cost advantages and benefits of the program were equal. Dennis and
in Puerto Rico. In addition, many of the nontax- Rafuse find tbis to be a modest percentage and con-
paying firms, particularly those operating under tbe elude that it would be a mistake to scrap the exemp-
1963 law, are still in operation in exempt status, tion program in favor of some completely difierent
most likely due to a renewal of their exemption alternative policy.
This conelusion may be warranted. However, it is
Fomento also examined the life cyele behavior of
important that caution be used in interpreting the
a set of firms which received exemptions in the early
results. Consider the following arguments:
and mid-1960's. The data reveal that only one-third
of the firms which received grant decrees (443 be- 1. The question asked implies that the choice is
tween 1960 and 1962) were actually established. between a zero tax and the full rate of Puerto Rican
Eighty-seven (60.8 percent) of tbe established firms business taxes. It is quite likely there is some optimal
operate at presento Thirty-one of those in operation efiective tax rate greater than zero, i.e., a positive
have extended their period of tax exemption either rate which could be levied in order to generate addi-
by moving to a new development zone, consolidating tional revenues and yet which would not become a
with another firm, manufacturing a new or difierent negative factor in tbe location decision calculus of
product, or benefiting from spedal textíle or elotbing most firms.
industry legislation. Ten of the firms are operating In background discussions for this study; some
as Commonwealth taxable firms (1975), but only manufacturing concerns felt that if the U.S. Govern-
six have reported profits. ment maintained section 936 provisions, then a
Benefits and Costs of Tax Exemption modest Commonwealth tax could be applied without
Programs driving business away from the island. As an attrac-
tion device, a maximum current profits tax rate of
Exemption programs are beneficial: (a) if they 20 percent to 25 percent was most frequently men-
attract investments which would otherwise not have tioned. Fomento economists have concluded (with all
l!1Holbrook. "A Study of the Characteristics," p. S6.
22EConomic Anal}'sis oi the Industrial Incentive ProgTam 01 Puerto 2a Robert Dennis and Robert W. Rafuse, Jr., Tax Exemption and
Rico. A report prepared by the Administration fo! Economic Develop· lts Alternatives, a report prepared for the Government Development
ment, Office of Economic Studies, February 1978, chapter 11. Bank of Puerto Rico, January 1976 1 pp. 53-57.

the appropriate caveats regarmng measurement prob- behalf of exempt industry is $481 million for the
lems) tbat the optimum aggregate tax percentage next 4 years. 25
would be about 18.3 percent. 24 The tax exemption also reduces the Common-
The Fomento estimate gives support to the idea wealth's ability to use its tax policy to encourage
that a reasonable incentive is a low tax rate structure. industrial integration. Firms which locate in Puerto
A 20-percent Commonwealth tax rate, for example, Rico for tax reasons do so largely because they can
would still offer possessions corporations effective magnify their profits to be repatriated to their parent
total tax rates which are less than half what they corporations and/or to take advantage of tax avoid-
would pay on the mainland. ance opportunities inherent in tbeir interfirm pricing
2. By considering tax revenues collected directly techniques. With section 936 benefits and its own
low rate e.g., 20 percent, of corporate profits taxa-
and indirectly as benefits and the tax loss due to the
tion, Puerto Rico wiII continue to attract the high
exemption as cost as Dennis and Rafuse do, it is
profit industries with mainland suppliers and distrib-
possible to measure the impact of the exemption utors. Tax benefits will not be sufficient to develop
on the receipts side of the Commonwealth budget. local links, just as they have not been sufficient in
However, such an examination is too simple. The the pasto
caIculations do not consider such questions as the What Puerto Rico can consider, however, is to
net public expenditures on behaIf of business firms design its tax policy so that the benefits it now gives
receiving exemption grants and their possible utiliza- to industries in the form of industrial incentives can
tion elsewhere. be directly targeted toward those activities which
The public investment expenditure is significant. meet planning objectives of the Commonwealth, such
One recent estimate of general service and promo- as employment, income, and Iinkage creation. (See
tional costs of the Puerto Rican Government on table 5.)
Table 5.-Income and Employment For Seetion 931 Corporations in Puerto Rico, 1975 and 1976'
Number of Ineome, Employment. employment,
Industry group firm, 1975 1976 ratio
Food and kindred products ___ .. _______________________ 15 (4.8) 64,402 (6.3) 4,904 (10.0) 13,133
Textile milI products __________ ._. _______________ ." ____________ .. _ 5 (1.6) 1,198 (.1 ) 275 (.6) 4,536
Apparel and other textile products _____ .. __________________ ... 76 (24.3) 41,170 ( 4.0) 13,185 (26.8) 3,122
Chemicals and allied products other than drugs __________ 19 (6.1 ) 60,283 (5.9) 2,451 (5.0) 24,816
Drugs __ .___ ._. ________ ____ ________________ ... ________ .... __________________ .. __ ._ 46 (14.7) 553,314 (53.8) 7.561 (15.4) 73,180
Rubber and miscellaneous plastic products _______________________ 10 (3.2) 1,058 (.1) 1,205 (2.5) 878
Leather and leather products _____ ~ _____________________________________ 9 (2.9) 6_935 (.7) 1,905 (2.2) 6,333
Fabricated metal products _________________________________________ ~__ 16 (3.1) 23,004 (2.2) 1,382 (2.8) 16,645
Electronic and electronic equipment ____________________________________ 68 (21.8) 174,455 (17.0) 11,769 (23.9) 14,823
Instruments and related products ___________________________________________ 14 (4.5) 25,907 (2.4) 1,552 (3.2) 16,171
Miscellaneous manufacturing .industries _____________________________ 12 (3.8) 16,353 (1.6) 906 (1.8) 18,050
Miscellaneous ___________________________________________________________ 22 (7.1) 60,641 (5.9) 2,867 (5.8) 21,151
Total --_______________________________________________ 312 (100.0) 1.028,450 (l00.0) 49.152 (20) 1120,924

:1 This sample is for 87 percent of the total number of section 931 's which accounted for 95 percent of total income in 1975. Percentage
composition of column total in parentheses. Details may not add due to rounding_
2 Unweighted average income rer employee.

Source: Data compiIed from Robert Holbrook, A Study 01 the Characteristics, Behavior, and Implications 01 "Possessions Corporation" in
Puerto Rico, a paper prepared for the Office of Tax Analysis, U.S. Treasury Department, 1977, p_ 64.

Lengtb of Exemption Period as an velopment areas outside San Juan. 26 In testing the
Inducement to Investment regional tax exemption against Fomento plant con-
struction and direct front-end subsidies, such as cash
The exemption period, particularly in the areas grants, it was concIuded that the exemption (lO
outside San Juan, may be unnecessarily long. Where- years) provided the smallest jobs-per-dollar return.
as a long-term exemption may be seen as an impor- In addition, in his examination of the growth effects
tant locational incentive from the Commonwealth's of adding an extra 7 years to the tax exemption
view, it probably has only a small effect on private period, Woodward concIuded that the added time
firms which tend to be most con cerned with in creas- was of a "secondary factor in the industry's choice
ing financial returns in the short runo to locate in Puerto Rico." 27 However, the increased
Empirical research lends support to this concIu-
sion. Recently, Robert S. Woodward compared the 25 Ibid.
cost effectiveness of three Puerto Rican industrial 28 Rohert S. Woodward, Industrial Incentives and Regional Eco-
nomic Growth: The Case 01 Puerto Rico, a dissertation presented to
incentives designed to encourage growth in the de- the Graduate School of Arts and Sciences, Washington University,
St. Louis, Mo_, August 1972, p. 141.
21 Economic Analysis, chapter VI. 7i INd., p. 124.

exemption was found to be of significance in deter- sector. Moreover, since 1950 most manufacturing
mining the urban vs. rural location within the island. investrnent in Puerto Rico has come from mainland
sources. The extent and timing of the increases in
Coropetitiveness and Type of Invesfroent such investments is suggested by the outflow of
income on investrnent. This item was $22 million
Research on the role of tax levels and tax incen- in 1950 as cornpared with $9 million in 1942, or in
tive abatement programs generally supports !be view real terms, 65 percent to 70 percent higher in 1950
that State and local taxes play a minor role in !be than in 1942. In contrast, the 1960 level in real terms
business location and expansion decisions. What are was about 300 percent higher than the 1950 level,
important are demographic and other market !be 1970 level about 260 percent higher than the
changes, and the nontax economic cost factors, such 1960 level, and the 1977 level about 175 percent
as transporation, land, energy, and labor. 28 As noted higher than !be 1970 leve!.
in the discussion aboye, however, it is difficult to These rapid increases are to sorne extent indica-
generalize these findings to Puerto Rico where manu- tive of the impact that the Puerto Rican tax holiday
facturing firms cau be exempted from Federal plus had on the attractiveness of the island for business
State and local taxes. activity (primarily by U.S. subsidiaries). However,
The tax holiday era in Puerto Rico has been this does not mean that economic factors other than
associated with high investment levels until the recent tax incentives schemes did not have a role in the
recession years. Gross fixed domestic investment firms' location and expansion decisions. , I
increased from $111 million in 1950 to a peak of Examples in Puerto Rico of the importance of
$1,913 million in 1975. It amounted to $1,454 "real" (nontax exemption) economic factors in loca-
million in 1977. In real terms, gross domestic invest- tion are readily available. The heavy concentration
ment in 1975 was 5.8 times the 1950 leve!. of investment in labor intensive industries in the
Although data are not available on investment by 1950's through the mid-1960's is evidence of the
sector, some idea of the amount of increase in the influence of relatively low wage rates. The buildup
manufacturing sector may be obtained by comparing of the island's petrochemical industry can largely
changes in the amount of private gross domestic be explained by the existence of oil costs which,
investment in machinery and equipment. Such invest- uutil the 1973 OPEe price increases, were less Iban
ment amounted to $23 million in 1950 and to $505 mainland costs.
million in 1977, an increase of 741 percent in real In short, Puerto Rican profit tax exemptions alone
terms. Given that most of this investment was in the magnify, but do not create locational incentives."9
manufacturing sector, the percentage increase shown The tax exemption only brings industry to the island
ahoye may be used as an indicator of the rate of once it is demonstrated that Puerto Rico can also
increase of investment which has occurred in that ofIer nontax economic competitiveness.
28 Roger J. Vaughn, The Urban Impact 01 Federal Policies, vol. 2, 29 Le<;ter C. Thurow, "Puerto Rican Industrialization Incentives for
Economic Development, The Rand Corporation, R-2028-KF-RC. the 1970's and 1980's," a paper prepared fOI the Puerto Rican Plan-
June 1977. ning Board, 1970, p. 3.

Chapter VII.-Industrial Linkage Analysis
BACKGROUND intermediate good imports and the greater the degree
of interdependence (or linkage) between economic
From the macroeconomic point of view, the effect sectors within an economy.
of an increase in autonomous investments to the Since the interindustry linkage concept was formu-
economy will be more significant the larger the lated by Hirschman, it has received increasing recog-
multiplier. The size of the multiplier, however, is nition by development economists. Hirschman, bas-
negatively correlated with the amount of "leakages" ing his argument on the importance of interindustry
out of the economic system. This "leakage," among linkage, disputed the widely recognized concept of
other things, includes the level of imports, i.e., the balanced growth which stated that the development
outflow of financial resOurces to foreign countries. process should be promoted such that "every [eco-
The total imports can be divided into the importa- nomic1 activity expands perfectly in step with every
tion of consumer goods and intermediate. goods. other." 1 He instead suggests a development strategy
Interindnstry transactions would reduce the inter- to aim at the maximizatioll of "induced" investments
mediate goods imported. Hence, other things being :l. Albert O. Hirschman, The Strategy 01 Economic Development,
equal, the multiplier will be larger the lesser the New Haven: Yale University Press, 1958, p. 63.

Chart lo
Imports and Multiplier

resuIting from the íorward and backward Iinkage extent that Puerto Rican policies can induce efficient
effects. "Backward Iinkage effects" refer to the in- linkages, greater employment and income should be
ducement oí attempts-by an economic activity- generated for the island. There is evidence to indi-
"to supply through domestic production the inputs cate lhat new industries entering the island in the
needed in lhat activity"; and "forward linkages eí- past 15 years have somewhat increased their local
fects" refer to lhe new economic activities which purchases and sales.
are indnced by attempts to utilize output of the An indication of the change in the level oí forward
original activity2 For practical purposes, the back- linkage can be observed by the ratio of interindustry
ward linkage effects can be measured by the propor- shipments (sales) to total value of shipments of
tion of an industry's output that represents purchases industries located in Puerto Rico .. According to table
from other industries, and the forward linkage effects 1, the "improvement" of forward linkages is ob-
are measured by lhe industry's total output that does
not go to final demand but rather to other industries." Table 1.---Shipments /0 Other Industries/Total
As it will take time for the Iinkage effects to pene- Shipments, by Majar Industry
trate the economy, a policy to maximize employment [In percentagesJ
at any particular period oí time may only represent a
temporarily optimum action. A well-planned policy SIC change
must take into account lhe effects on income and Code Industry 1963 1972 1963~72

employment generated through the "linkage effects" 20 Food ____ ... _____________ 28.8 25.7 -10.7
21 Tobacco -----------_.---------- 16.4 5.7 -65.2
in the long termo 22 Textile _______.______ 24.4 24.7 1.2
Another important implication of the Iinkage con- 23 Apparel ----------_.--_.- 8.6
Wood products ._______.'__ .. __ ._ 50.2
12.3 43.0
24 63.0 25.5
cept is that development strategies should also aim at 25 Fumiture -----------_._._-, 35.7 38.9 9.0
increasing the interindustry dependency to increase 26 Paper ------------------ 59.4 76.8 29.3
27 Printing _______ .. _______ ,____ 9.1 8.6 -5.5
the "induced investment effects." Experience shows 28 Chemicals -_._ __.. .. ..._------- 10.2
, 16.2 58.8
29 Petroleum ---_._----------- NA 58.9
lhat developing countries following an industrializa- 30 Rubber and plastics -------------- 20.0 42.4 112.0
tion policy cornmonly begin the development process 31 Leather ~---~---------- 9.7 11.9 22.7
32 Stone and glass 27.4 35.6 24.9
with the establishment oí a few industries to meet 33

Primary metaIs ----------_._--_.. 76.6 40.2 -47.5

domestic demands using mostly inputs imported from 35 Pabricated metaIs _._-_._-_._ ... _-- 22.9 46.2 101.7
35 Machinery except electrical 18.7 12.8 -31.6
abroad. The manuíacturing sector's import coeffi- 36 EIectrical machinery ________ 2.0 4.7 135.0
37 Transportation _._--------- NA 38.8
cient is high and there are little linkage effects. As 38 Instruments ----------------- 2.9 3.3 13_8
the economy progresses, more industries are being 39 Miscellaneous manufacturing _ 11.2 6.6 -41.1
established which increase the demand and supply Overall percentage ----- 23.1 24.7 6.9
oí domestically produced goods and enhance the Source: U.S. Department of Conunerce, Burean of the Census,
transactions among industries. Interindustry linkages Census 01 Manulacturers, Puerto Rico, 1963 and 1972 series. The data
are for establishments with lOor more employees.
improve the process of "vertical integratiou," and
natural import substitution (Le., reduction oí im- served in 12 oí 20 major industry groups between
ports) tilkes place. The rate oí vertical integration oí 1963 and 1972. The most improvement was experi-
industries, with respect to time, varies between coun- enced by lhe rubber and plastic products and fabri-
tries, mainly because of the various resource endow- cated metal groups, where the ralios oí shipments to
ment and economic structures. other industries to total shipments were both large
and increasing at a rapid pace. The next best per-
forming groups were chemicals (59 percent in-
LINKAGE PROSPECTS IN crease), then apparel (43 percent), electrical and
PUERTO RICO electronic equipment and chemical products, al-
though improved significantly, still sold only a small
The importance oí increasing interindustry link- portion of their outputs to local industries.
ages is to increase the value added to the Puerto On the other hand many industries actually re-
Rican economy. As indicated by Hirschman, the duced lheir interindustry sales ratio. Most significant
sustainability of growth may be enhanced through were the primary metal industries, miscellaneous
greater interindustry linkages among export indus- manufacturing, tobacco, and nonelectrical machinery
tries whose markets are diversified geographically. industries.
This diversification would reduce the market vul- On the average, however, the forward linkage
nerability to cyclical downturns in one economy, appeared somewhat improved íor the manufacturing
but not to a worldwide recession which would be sector as a whole over the 1963-72 period, as the
detrimental to any economy, open or no!. To the interindustry sales to total shipments ratio íor "all
2Ibid., p. 100. industries" increased slightly from 23.1 percent to
slbid., p. 105. 24.7 percent.

Current data is not sufficient to allow a thorough
investigation of the change in lhe backward linkage
trend in the Puerto Rican economy. However, sorne
implications can be drawn by examining the data on
imported raw materials and intermediate goods. As
the backward linkage can be measured by "the pro-
portion of an industry's output that represents pur-
chases from other industries," lhe higher the back- Ratio (a) is relatively more desirable since it con-
ward linkage, the larger thé ratio of domestically centrates on the measurement of the backward link- .
producted input to total production, or the smaller age of the industrial sector, while ratio (b) tends to
the ratio of imported inputs to total production. The capture the backward linkage of other sectors as
lalter ratio can be approximated by: well.

Table 2.-Ratios oi Inputs Imported

1963 1972 1973 1974 1975 1976 1977

Capital goods, raw materials. and intennediate goods imported (ID millions of
dollars) -_. __ .----_._--~------~--------------~-----_._._-~._-----------_.------ 686.1 1,799.5 1,994.9 2,742.0 3,347.8 3,466.7 3,945.0

Total manufacturing value of shipments (in millions o, doIlars) -------------~-

1,480.4 4,143.6 NA NA NA NA NA
GDP (ID rnillions o, dollars) -_.. _-----------------------------_._-~-- 2,333.6 6,333.5 7,030.4 7,758.6 8,207.7 8,876.0 9,717.0
Ratio (a), Capital goods, raw materials, and intermediate goods imported
(in percentages )-value o, shipments -------------"---------- 46.3 43.4

Ratio Capital goods. raw materials, and intermediate goods imported

(in percentages)-GDP _._-----------------------. ________L -___________________ 29.4 28.4 28.4 35.3 4O.S 39.1 40.1

Source: Puerto Rico, Planning Board, 1977 Economic Report to the Governor (varioos tables).

Table 2 shows that both indications of backward corporations. This has been noted by a. recent report
linkages (ratios (a) and (b)) agree lhat Puerto Rico by the Puerto Rican Planning Board's Cornmittee
became less dependent, in relative terms, on im- on the Economic Development Strategy Project:
ported inputs from 1963 to 1972. " ... in general, Puerto Rico manufacturers imported
semifinished products whose production began pre-
cisely here. 5
THE NATURE OF INDUSTRIAL The main reasons for the lack of transactions
INVESTMENT LINKAGES conducted between industries located in Puerto Rico
The industrial growth of Puerto Rico has been
achieved mainly by offisland investments. This was • Puerto Rican firms, as a branch of U.S. cor-
necessary if the well-being of the island's people was porations, must produce outputs which are, in
to be improved at a rapid rateo It has been shown most cases, identical with outputs prodnced by
(elsewhere in this report) that the majority of firms other branches in the United States.
locating in Puerto Rico are U.S. subsidiaries. The • To assure the uniformity of output quality, raw
widening gap between GNP and GDP indicates that materials and intermediate goods should ideally
these non-Puerto Rican companies are playing an be purchased from preselected sources, which
increasingly significant role in the island's economic are usually located in lhe United States.
In lhe production process, most raw material and .• The centralization of lhe distribution function
intermediate goods are shipped to the subsidiary of input and output by the parent firms is sorne-
firms by their parent companies, or by US. distribu- times necessary because lhe Pnerto Rican firms
tors through arrangements made by the parent com- lack the knowledge concerning the United
panies. The outputs produced are shipped directly to ~ It is possible that a significant part of the import of capital, raw
material, and intermediate goods' are for the agricultural sector,
the mainland companies for distribution, inclurung and the variation of these agricultura1 ÍlIiports would distort tbe
redistribution to Puerto Rico. In other words, the mentioned ratio representing industrial linkage. However, in view of
the steady decline in agricultura1 activities, imported agricultura}
general practice of many U .S. corporations is to use inputs should have decreased; in such an event, fue linkages would
be overstated.
Puerto Rico as a production point only. The func- 5 Cornmittee on fue Economic Development Strategy Project,
tions of purchasing raw materials and marketing "Sorne Cornments on the Industrial Integration Process of Puerto
Rico," Puerto rucan Planning Board, San Juan, Puerto Rico.
and distribution of outputs are handled by the parent September 1974.

States and world markets. Furthermore, it expertise. The poor distribution system probably
would maximize the benefit derived irom the also causes the U,S. subsidiaries to depend heavily
economies oi scale. on their parent companies. On the other hand, their
reliance on the parent companies has reduced the
Evidence, aIthough scattered, tends to support the demand for marketing and distribution services and
aboye hypothesis that U.S. subsidiaries purchased
not contributed to strengthening of the Puerto Rican
very little directly from other firms located in Puerto distribution system.
Rico, and that there is very little interdependency
between Puerto Rican industries as a whole. A sur-
vey oi 77 apparel firms conducted by the V.S. De- CONCLUSIONS AND POLICY
partment of Labor, Wage and Hour Division, cover- IMPLICATIONS
ing 8,917 employees revealed that:
The U.S. corporations, in maximizing their effi-
• out of 77 firms, only 20 had a significant por- ciency may not have made sufficient attempts to
tion oi their output sold to local industries or either purchase inputs or distribute (seIl) outputs
consumers; of which 16 were local firms (not to local industries and consumers. This problem
affiliated with a U.S. firm). has been recognized by Hannah, 7 and by the Com-
'. out of the same 77 firms, only 5 purchased a mittee on the Economic Development Strategy Proj-
significant portion of input from local sources; ect, 8 and by other economists and planners.
of which 3 were local firms. 6 It is recognized that Puerto Rico's smaIl market
size is a factor limiting the attempt to increase local
In short, under the present economic structure, production oi inputs ior industrial uses. However, a
Puerto Rico's U.S. subsidiary firms appear to be policy of efficient import substitution in combination
reduced to only "production units" with a main with export expansion, an improved distribution sys-
function of producing most efficiently in terms of tem, and a system of tax incentives-to disconrage
minimizing companywide production cost and wast- offisland purchase of inputs available 10caIly-could
ages. The local industries do not emphasize in their enhance the economic development process on
operation local purchases of inputs and local dis- Puerto Rico.
tribution and marketing of outputs. They remain Concerning the improvement of the distribution
dependent on the parent companies who have very system, the creation of a trading company has been
little knowledge of the local markets, with respect discussed but not evaluated as a means of improving
to the availability of the inputs and (to a lesser the distribution and marketing systems. The main
extent) the demand for the industries' output. As a functions of this organization are to improve the
result, most of these firms import their raw materials marketing and distribution of Puerto Rican products
and export nearIy all their production. This limits the for local, U.S., and international markets, and to pro-
potential for both backward and forward linkages, vide information for existing distribution businesses
and the industrial process in Puerto Rico is not and sources for industrial procurement. Sorne other
verticaIly integrated, despite the tremendous increase recommendations provided by earlier reports stiII re-
in industrial output over the past 30 years ' main valid and deserve consideration. These inelude
In addition, it is conceivable that the distribution the Government's conduct and publication oi peri-
system is stiII at a low level of development. Discus- odic surveys of manufacturers' unmet local supply
sions with Puerto Rican industrial leaders revealed needs and consideration for elimination of excise
cases where plant managers (especiaIly local plant taxes on items which are predominantly used as
managers) iound themselves unable to expand be- inputs in the production process of industries in
cause of their lack of marketing and distribution Puerto Rico.
6 U.S. Department of Labor, Employment Standards Administration, 7 Robert Hannah. el al., Fomento: The Dynamics 01 Economic
Wage and Hour Division, Men's and BOYff Clothing and Related Development in Puerto Rico, (n.p., 1966), pp. 28-29.
Products Industry in Puerto Rico, JuIy 1977. 8 Committee on the Economic Development Strategy Project, op. cit.


Chapter VIII.-Import Substitution
INTRODUCTION This chapter will examine the possible economic
impact of such a policy and provide sorne recom-
Historica!1y, a large portion of commodities con- mendations on the types of import-substitution in-
sumed in Puerto Rico have been imported. The island dustries that would likely be most beneficial given
purchased $6.1 billion worth of goods from abroad Puerto Rico's economic structure.
iu FY 1977, about 60 percent of which were ship- Before proceeding with the analysis, it should be
ments from the U.S. mainland. The island's import noted that Puerto Rico is within the U.S. customs
coefficient (import/GDP) was 63 percent, a ratio area and has no authority to impose tariffs or import
considered fairly high among open economies. quotas as in the case of an independent country.
Such a large import coefficient implies that a However, on various occasions, Puerto Rico has
major portion of an increase in Puerto Rican income seriously considered requesting the extension of au-
is spent on imported productJ and only a ~ma!1 thority to levy separate import duties and other
portion is used to purchase goods produced by local nontariff barriers-as in the case of coffee-to pro-
establishments and workers. It is conceivable that mote import substitution? At present, Puerto Rico
sorne reduction in import dependence would be has the power to impose excise taxes and grant tax
highly desirable providing that it would not impede exemptions and government subsidies to encourage
the productivity and efficiency of Puerto Rico's in- local industries. However, this section does not offer
dustries, or severely restrict purchasing options of import substitution as an alternative to the present
consumers. "Import substitution policy" has been export-Ied growth strategy, but only as a means of
offered as a solution to reduce the significance of supplementing strategy to increase employment and
imports and increase employment. income to the island's economy.
"Import substitution" is usua!1y interpreted as a
process taken by many less-developed countries to THEORETICAL CONSIDERATION
promote their "infant industries" in the initial stages
of industrialization. Sometimes, it is viewed as a
"c1osed" development process which represents an
At first sight, import substitution or "replacement
attempt, in response to foreign trade restrictions, to
of imports by locally produced goods" appears to be
reproduce in an accelerated form the industrializa-
not orily politically appealing but also economicaHy
tion carried out in the past by more developed
sound. In fact, many countries, inc1uding South
countries." The term "import substitution" used in Korea, Israel, Argentina, etc., have experienced a
this report should be understood as a simple and
notable economic growth subsequent to the adoption
literal way to denote the reduction or elimination of of an import substitution industrialization (ISI)
certain imports and their replacement by domestic
policy. However, for a substantial number of other
products. The process could take place through in- less-developed countries (LDC's) fo!1owed ISI, the
duced means of nontariff barriers or subsidies given
success was limited to the initial stages of develop-
to industries producing for local consumption. ment. Economic recession and high unemployment
Past research on Puerto Rico's import substitution eventually resulted. Import substitution is therefore
tends to emphasize the benefit mechanically derived viewed by many economists as a do~ble-edged
from an import reduction without sufficient consid- sw~rd. Improper methods used in implementing this
eration given to the policy instruments used to pro- pohcy may cause more harm to an economy in the
mote such a policy, and to their consequences. Ex- long runo The following section will consider ISI
perie:,ce~ of les.s-.developed countries using import- from a theoretical economic perspective and review
substltutlon pohc¡es to promote domestic industries the experiences of various countries undertaking im-
have not always shown good results.
II For example, see The Interagency Committee of Puerto Rico
:l.Econom~cBulletin for Latin America, vol. IX, No. 1, 1964, Economic Development 01 Puerto Rico--A Development Strate¿'
Umted NatlOns, New York, 1964, p. 3. for the Next Decade, San Juan, Puerto Rico, Nov. 1975, p. V-16.

port substitution policies. The causes of their success high tari/f rate on lbe import substitution goods and
and failure can serve as a guide for the future policy lbe low or negative tariff on lbe inputs used in lbe
direction taken by Puerto Rico. production process of the new import substitution
Import substitution is conveniently divided into industries. In addition, the new industries are usuaIly
two categories: the substitution of intermediate qualified for a range of generous tax exemptions and
goods; and the substitution of imported consumer government subsidies.
goods by domestic production. The latter path was Given such favorable treatment, together with
folIowed by nearly alI LDC's adopting the import the knowledge of the size and structure of the domes-
substitution policy. tic market, the newly estabJished import-substitution
Support for import substitution comes from the industries generalIy enjoy a profitable operation
LDC's balance of payments problem and an increas- while facing Jittle or no competition. As import sub-
ing demand for imported consumer goods. ISI pro- stitution process extends to other commodities (in-
ponents suggest that, at first, lbe country may import dustries) the industrial sector will rapidly become a
semifinished goods, and assemble and convert these "lead sector" in economic growth.
almost-finished industrial imports into final products. However, after the initial period of success-
The successful reduction of imported final consumer whieh usualy lasts about lOto 15 years in most
goods wiII ease the country's balance of payments countries-the rapidly increasing supply would out-
and further push the consumer demand upward. A grow the demand; a period of stagnation begins. At
point wiIl eventuaIly be reached at which the local this time, lbe economy is left wilb the high unem-
demand for intermediate components and basie ployment and a few relatively high-cost industrial
goods is sufficiently high to warrant investment in establishments whose operation depends on the im-
their production at home. In other words, import ported raw materials, intermediate goods, and whose
substitution which increases the demand for con- production is Iimited to meeting the slowly increased
sumer goods wiIl also, after a period of time, gen- domestic demando The reasons for this growth bot-
erate demand and production in the capital and tIeneck are: (a) the inherent technical and economic
intermediate goods sector. inefficiencies of the protected industries which can-
The key instruments used to induce the initial not produce and sell the products at international-
switch of demand from import to domestic products competitive prices; and (b) the task of further back-
and promote import substitution include: ward Iinkage development is difficult or unachieve-
(a) Policy to increase price of imports. This is The technical inefficiency (Le., the failure to mini-
done by imposing a high tari/f on competitive import mize costs) arises out of the system of protection
goods or adopting exchange-rate policies that dis- and subsidy provided by the government to import
criminate against imports; substitution industries.
(b) Policy to restriet imports, through adoption Given the limited knowledge of government plan-
of import quotas; ners on the profitability of individual businesses, the
(c) Policy to lower the prices of domestic goods system would inevitably include under its umbrella
by financia! incentives and subsidies given to local many comparatively disadvantageous industries. Re-
industries which produce import substitution prod- search undertaken by Howard Pack on Israel's
ucts; and import substitution program found that "a dispro-
(d) Legal requirements to replace important portionate amount of capital resources were alIo-
components with a locally produced equivalen!. cated to reIatively inefficient branches (industries)." 3
ParticularIy, intensive import substitution was 00-
These means to promote import substitution are
served in the chemical industry, where both the
often criticized as causing the inability of lbe indus-
efficiency and labor absorption rate are low.
trial sector as a whole to maintain a sustained
Furthermore, the "economies of scales" and "spe-
growth, the high prices, the worsening of income
cialization," the keys to efficiency, have been sacri-
inequality, and an inefficient production process
ficed in the e/fort to divert production resources to
geared to historical technology.
meet the demand for a wide range of consumer
goods. Power and Sicat, in examining the conse-
Inability to Maintain Sustained Growth quences of the Philippines' import substitution pol-
iey, have concluded:
The import substitution process begins with a
government policy to increase the priee of certain The favoring of finishing-stage consumption
foreign goods sold in lbe domestic market, and to goods industries at the expense of more basic
decrease the price of the same goods produced 3 Howard Pack, Structural Change and Economic Policy in Israel,
10calIy. This is accomplished by an adoption of the New Raven and London, Yale University Press, 1971, p. 81.

manufactures, together with the bias against ex- improved, 8 especially if the import substitution pol-
ports, has caused resources to be dispersed in icy is linked to efforts to expand exports.
maily small consumption goods industries, hori- The country's increasing dependence on imported
zontally balanced in relation to consumer demand, inputs implies backward integration of !he import-
rather than concentrated in vertically integrated substitution industries is not taking place. Efforts to
large-scale industries producing both for the improve !he backward Iinkage investments by ex-
domestic and world markets. Consequently, the tending the protection and subsidy to input-produc-
potential gains from economies of scale and from ing industries are often met with a strong resistance
leaming-by-doing, in !he context of more rapid by the initial industries. The reason is !hat the high
and concentrated growth, have been foregone. 4 profits enjoyed by the initial industrialists depend
on their ability to obtain imported inputs at low
Another cause of the technical inefficiency is that prices, but the promotion of local production of
the new industries which are set up behind tariff inputs means that any increáse in input prices is
walls to replace imports would Iikely suffer from the expected, as stated by Hirschman:
high production costs and poor management. They
are able to perform well only in the task which The greater the difference between the level of
they are created for-import substitution-and un- protection accorded to import substitution indus-
der conditions in which they are created-protection try and that applying to its imported inputs, !he
and subsidy. In addition, the small size of domestic more will the profit margin of the industry depend
markets of many developing countries implies that on preventing domestic production of the inputs.
in most industries the number of firms of economic For it is a fair assumption that the backward
size is not sufficient to ensure vigorous domestic linkage industry would, once established, be eligi-
competition. International competition, !he firms' ble for a level of protection similar to that bene-
only source of competitive pressure to encourage fiting the initial import substituting industry.9
efficiency and technological progress, is eliminated An example of the inability of the import substi-
through protection. tution industries to integrate backward can be seen
The economic inefficiency (Le., the misallocation in Mexico, where the automobile assembly plants
of resources) occurs as a result of the bias against existed for decades without any progress being made
the production of intermediate goods, capital goods, toward the manufacturing of motors and other as-
and raw materials (inputs) used by the import sub- sembly parts.'o The Philippine experience also shows
stitution industries. The system of protection-subsidy "The early gains from taking over an existing market
creates a low market price for imported capital for consumption goods from excIuded foreign sup-
equipment and intermediate inputs and destroys any pliers are not easily repeated when the tasks become
incentive to produce locally. This provides a tend- integrating backward to the production of interme-
ency for import substitution industries to remain diate and capital goods, and breaking into the export
heavily dependent on imports. "Import dependent market." 11
import substitution" 5 persists, and the N ation's goal
to reduce imports is seIf-defeating. Little, Scitovsky,
and Scott's study on Seven large less-developed High Prices, Worsening of Income
countries 6 following import substitution policy con- Distribution, and Unemployment
firms this hypothesis. They stated: "[Import substi- Problems
tution] tends, paradoxical1y enough, to increase the Import substitution processes may cause a higher
economy's dependence on imports. Complete seIf- cost of living. Import restriction would exert pres-
sufficiency is probably an unattainable goal; and as sure to raise prices of imports; and the prices of
the economy becomes more nearly seIf-sufficient, it domestic substitutes usualIy also rise to a high level,
also becomes more import dependent, in the sense just below the import prices to preserve a competi-
that the availability of the goods it stiII has to import tive edge. Domestic competition, even when de1iber-
becomes more crucial for the smooth functioning of ately encouraged, is often insufficient to break the
the economy." 7 However, they did not deny that in c10se link between the prices of imports and import
the long run the economy's seIf-sufficiency can be substitutes. This is partly because of the small do-
4- Jobn H. Power and Gerado P. Sicat, The Phllippines, Industriali-
mestic market which prevents competition-as dis-
zation and Trade Paliey, Oxford University Press, New York, 1971, cussed earlier-and partly as a result of the govern-
p. 127.
5 This term was used by Power and Sieat, op. cit., p. 104. 8 lbid., p. 62.
6 Argentina, Brazil, Mexico, India, Pakistan, Taiwan, and the 9 Albert O. Hirschman, 'TIle PoUtica! Economy oí Import~
Philippines. These countries together comprise Qver half of the Substituting Industrialization in Latin America," The Quarterly
developing world. Journal oi Economics, vol. LXXXII, No. 1, Feb. 1968.
71. Little, T. Scitovsky, and M. &ott, lndustry and Trade in Sorne 10 [bid., p. 19.
Developing Countries-A Comparative Study, (Londan, Oxford Uni- 11 The Economist Intelligence Unit, Quarterly Economic Review,
versity Press, 1970). pp. 59-60. "Philippines-Taiwan Annual Supplement," 1970, p. 5.

ment's policy to maintain a high selling price to The high unemployment refIects and intensifies
retain an attractive profit margin in the domestic the unequal income distribution problem. The in-
industrial sector. Little, Scitovsky, and Scott also come would become more concentrated in the high
observe: capital-intensity sector. High-income groups .consume
technically more sophisticated goods, whlch have
To raise manufacturing prices and hence profits relatively high direct and indirect import require-
is generally considered desirable in order to pro- ments. This would add forces to further the coun-
vide extra rewards that will offset both a sup- try's dependency on imported goods as a result of
posed lack of entrepre~eural spirit in deve~op~g import-substitution policies. . .
countries and the handlcaps of manufactunng rn The aboye analysis of undesirable economlc Im-
an environment where many supplies, facilities, pacts of policy following intensive import-substitu-
and skills are still lacking, and the discipline of tion strategy does not imply that the strategy should
labor and the reliability of business accounts are at be totally discounted in all developing countries. It
a low leveI.'" leaves open Ihe possibility of using Ihe strategy as a
Evidence also indicates that countries following temporary means to support the local industries in
import-substitution industrialization generally ob- their infant stages. Chenery found that "almost all
serve a worsening trend of income distribution. countries have gone through a period of favoring in-
This is a rather obvious result of the government's dustrial production for the domes tic market, and it
policy to boost the profits in the manufacturing is at least arguable that for many types of manufac-
sector in order to provide an incentive for this sec- tured goods this process favors the subsequent de-
tor to compete wilh imports. The additional income velopment of exports." Countries which quickly
that protection secures for labor and management switched to export expansion after the initial period
in the industrial sector results in higher prices, and of import substitution have generally achieved a
sustained growth.
a loss to those associated with other sectors. This
causes a concentration of income in the urban and Israel has been able to maintain the high rate of
industrial area. In addition, the inequalities are fur- economic growth after the 1950-58 period in which
ther worsened by the tendency of import-substitu- import substitution strategy was intensively used. The
tion industrialization to shift income in favor of post-1958 growth, however, was propelled by .the
profits over wages within the manufacturing sector high growth rate of exports, while import subst:tu-
itself. tion continued in the intermediate-goods industnes.
The government had skillfully channeled all excess
Another distinguished feature of most economies
capacity in the previous import substitution indus-
following import-substitution policy is the high un-
tries to production for exports. This was accom-
employment of unskilled manpower. The rate of
panied by the government's vigorous efforts to en-
labor absorption is usually substantially below the
courage the entry of new finns to increase competi-
rate of urban population growth. In Latin America,
tion and efficiency. In addition, exports received a
after more than two decades of industrialization, the
favorable exchange rate and the formation of cartels
proportion of labor force employed in manufactur-
was legalized. The cartelization agreements allowed
ing has actually decreased. The low rate of ind?s-
the higher prices in the domestic market t~ enable
triallabor absorption is attributed to the factor pnce
the industries to engage in a strong export dnve. An-
distortions. The investment incentives-.-to lower
other important feature of Israel's export process in-
capital costs and stimulate industrialization-have
cluded the initiatives-by the government or trade
depressed the price of capital in relation to labor
organizations-to establish contacts with fore!gn
and encourage labor-saving techniques. At the same
purchasers, set quality standards, impro."e m.arketrng
time, labor legislations keep the wages high and
methods, and insure against unusual nsks rnvolved
further encourage capital-intensive techniques of
in exporting.
As the export demand grew, the domestic dernand
Sicat's study of the Philippine manufacturing,13 for intennediate goods also increased. Thus, with
whose result was confirmed by Williamson,14 re- sorne degree of incentives provided, the import sub-
vealed that a 10-percent increase in the relative stitution process continued in many intermediatec
price of labor would account for a 10-percent de- goods industries. The process of vertical integration
crease in the amount of labor employed per unit of can also be accelerated by appropriate policy ac-
capital. tions. Hirschman observed that the regulations issued
Little Scitovsky. and Scott, op. cit., p. 41.
1.2 by the government of Brazil had caused a rapid
13G. P: Sicat, "Industrial Production Functions .in the Philippmes," enforcement of the backward linkage in the Brazilian
I.E.D.R. Discussion Paper, 68-18, May 23, 1968.
HJ. G. Williamson, "Relative Price Changes, Adjustment Dynamics, automobile industry.'5
and Productivity Growth: The Case of Philippine Manufacturing,"
S.S.R.1. Workshop Series, University of Wisconsin, 1969. 15 Hirschman, op. cit., p. 19.

ConcIusion and Poliey Implieation which would likely incJude under it a number of
comparatively disadvantageous industries. These in-
The aboye analysis indicates that overemphasis dustries will continually depend on government sup-
on import substitution without sufficient attention port; they are not technological!y prep~red and eco-
given to export expansion can lead ~ deve~o~i~g nomically efficient to enter the mternatiOual market,
country to stagnation after a short penod of mlllal where transportation cost must be added, govern-
success. The primary reason for such a development ment assistance is less effective, the market is un-
failure is that the policy instruments used to pro- known and the competition is more persistent.
mote import substitution-tariff and nontariff pro- c. Another factor that should be given considera-
tection and government subsidies-tend to cause tion by Puerto Rican authority is that overempha~is
factor price distortions and encourage com- in replacing a large number of imported goods w¡]l
paratively disadvantageous industries and foster divert the island's resources and reduce the advan-
inefficiencies. tage of economies of scale. A program to prod,:ce
On fue other hand, import substitution has been consumer durable goods, such as stoves and refng-
successful in fostering the development of infant in- erators to meet the local demand without an export
dustries, and led many less-developed couutries to horizo~ would likely prove to be unsuccessful in
a sustaiued economic growth. These countries, how- view of fue limited number of households on the
ever, only pursued the import substitution policy in island which would purchase these products, hence
the short, early stage of industrial development, then only a few items will be produced, resulting in a
switched development emphasis to export expansiono high per-unit cost of production.
Long-run liberal trade policies are viewed as de- d. Government should identify and give fue de-
sirable for small developing countries whose do- velopmental priority to ~mport substitution ind~s­
mestic market is too small to enhance economies of tries that have comparatlVe advantages. These m-
scale in production. dustries should have a promising prospect of being
Puerto Rico, in fue short run, may choose to pro- able to compete in the local as well as !he export
mote the replacement of imported goods by local markets after the initial period of assistance, and
production without damaging the comp:ti~iveness when the domestic market has reached a satura-
and export potential of local goods, proVidmg fuat tion point. Also, industries that produce for do-
precautions are taken to. ensure the pres~rvatio~ of mestic and U.S. or foreign markets simultaneously
the industries' technologlcal and economlc efficlen- should be encouraged.
cies. In promoting such a policy, the following points
should be kept in mind. While the Commonwealth under the present com-
mon market status is unable to apply independent
a. Puerto Rico, as a part of the United States, is
external tariffs, the investment in intermediate-goods
within the U.S. customs area. It does not have the
industries linked to local industrial demand must be
authority to impose a separate tariff on specific
of sufficient size to be competitive and must be suffi-
commodities which are either made in the United
cient to overcome any adverse externalities, ofuer-
States or in a foreign country. Excessive protection
wise local industrial resistance to import substitu-
will not likely be achieved. Because Puerto Rico
tion would be strong. Under appropriate policy
has a common currency with an enormous U.S.
guidance, increasing import substitution can impro,:e
market, the problem of an overvaluedexchange rate
the interindustry linkages and increase the multl-
experienced by independent countries ca~ tot~lly be
plier effectsY .
discounted. The other means of promotmg Import
However, it should be noted ¡hat vested m the
substitution would be through a system of govern-
present Puerto Rican economic system is another
ment subsidies and excise taxes. Even though the
special excise tax imposed on nonIo cal items is sub- important factor that m~y imp~de the move:nent to
improve the backward lmkage mvestments; I.e., the
ject to constitutionality challenge, it is possible that
presence of a large number of U.S. subsidiaries in
Puerto Rico can initiate excise taxes on certain goods
the island. To assure the uniformity of products
having an import-substitution potential and use part
produced in Puerto Rico and in other branches in fue
of the revenue proceeds to subsidize local industries
United States these subsidiaries must, in most cases,
producing these same cornmodities. '6
purchase mat~rial and intermediate goods from their
b. A policy instituted by extremely generons sub-
parent companies. This, plus the lack of confidence
sidies given to import-replacement industries may
in the steady and onschedule supplies of local in-
increase ecouomic inefficiencies and resource mis-
puts may create a tendency to "resist" the pu~cha~e
allocations. Similar to the case of other LDC's, in-
of locally produced inputs. Government actlon IS
efficiencies will arise out of the "subsidy umbrella"
needed to discourage this tendency. The action may
la This method was suggested by Interagency Committee oí Puerto
Rico, op. cit., p. 16. 17 Tbis point is further discussed in section IlI.

be tied to the initial investment incentive package leum imports, agricultural commodities, e.g., coffee,
given to the import-substitution industries, aIlow- fish, beef, and various meat products, constitute a
ing additional tax breaks if they purchase local in- significant part, leaving manufacturing imports as a
puts or extend the operation to produce inputs 10- smaIl portion of the total shipments to Puerto Rico.
caIly after a certain period of time. In sorne cases, Furthermore, these manufacturing items either are
where it is determined that a Puerto Rican industry based on resources which cannot be economicaIly
can efficiently integrate backwards, but could not transported to Puerto Rico for processing (e.g.,
do so because of the lack of cooperation on the in- lumber, food products).!O (See table 1.)
dustrialists' part, strict regulations may be insti- In contrast, U.S. shipments to Puerto Rico have
tuted. The resistance to backward linkage invest- been large and contained many items which can be
ments is undesirable from the point of view of the efficiently produced in Puerto Rico. This section,.
economy as a whole. '8 therefore, concentrates on the import substitution
of manufacturing goods originating from the U.S.
mainland. 20
POTENTIAL IMPORT SUBSTITUTION a. Identify major U.S. manufacturing import
INDUSTRIES items, arbitrarily defined as those with an import
General value in excess of $20 miIIion in calendar year 1976
(the latest year in which the detailed trade data are
In 1950, Puerto Rico imported $345 miIIion worth available).21
of goods from abroad; by 1977, the imports were b. Discuss the general import substitution poten-
$6,108 miIIion, a 17-fold increase. The island's tial of each of the industries identified, based on the
import coefficient (ratio of imports/GDP was 47.7 available information. Industries showing a good
percent in 1950; it fluctuated around a slightly in- potential wiIl be further analyzed in the foIlowing
creasing trend to reach 49.7 ¡rercent in 1973, then section IV.
sharply rose to 62.9 percent in 1977. The sharp
1977 increase probably reflects sorne inventory re- Major Manufacturing Import Items
stocking and recovery from the 1975/76 recession.
Moreover, the increase in the price of crude petro- The major items shipped to Puerto Rico from the
leum imports was another contributing factor. United States totaled nearly $1 biIIion in 1976, con-
An examination of the components and sources of stituting more than one quarter of aIl manufactur-
imports shows that the promotion of import sub- ing and nonmanufacturing shipments to Puerto Rico.
stitution for manufactured goods would not result in These manufactures are categorized into consumer
a significant reduction of the total Puerto Rican non durable, consumer durable, and intermediate
imports. ExcIuding petroleum, imports averaged only goods, and are presented in table 2.
15 perceht of aIl imports in the past 5 years, and The single largest item of consumer nondurable
this percentage is decIining. Among the nonpetro- imports appears to be food products ($113 miIIion).
18 Hirschman argues that the resistance to backward integration
The largest single item imported in the consumer
would no longer exist if the initial impart substitution industries durable goods category is "motor vehicIes" which
themselves would integrate backwards, le.. to produce their own
inputs. The industrialists' ability to do so, however, depends on the amounted to nearIy $300 miI1ion in 1976. Household
process and techniques with which the inrlustrialists are already furniture ranked second with $61 miIIion; electrical
familiar. The backward linkage would be more easi1y achieved in
say, the "inbred" metal working than in the textile industry whose machinery and equipment and motor vehicIe tires
inputs come in large part from technological strangers, such as the
chemical industry [Hirschman, op. cit., p. 19]. In addition, backward 19 See chapter 9.
integration can be achieved in the case in which high technology is 20 The goal of import substitution of commodity "i" is to reduce
not required. Discussion with producers of bakery products reveals the ratio of Mi/Ci-where M = =
imports, and e local consumption
that many of the metal cans and cantainers are produced by the (by industries or consumers) of the conunodity-by reducing Mi.
same factory. This is because it is relatively simple and cost-effective 21 These are 4-digit schedule B iteros. The values shipped are
to produce the cantainers (it requires only ane machine), althOllgh reported in U.S. Trade with Puerto Rico and U.S. Possessions, FTC
the technologies are difIerent between the production of bakery Annual 1976, by the U.S. Department of Commerce, Bureau of the
products and of metal cans and containers. Census.

Table l.-Puerto Rican Imports From the United States and Foreign Countries

1950 1960 1970 1972 1973 1974 1975 1976 1977

Impart __________ (millions of dollars) ~ 345 915 2,556 3,108 3,496 4,261 4,951 5,432 6,108
Export ____________ (millions of dollars) ___ 235 622 1,729 1,797 2,466 3,339 3,138 3,346 4,480
Net Import-Export (millions of dollars) ___ 110 293 827 1,311 1,030 922 1,813 2,086 1,628
GDP _______________ (millions of dollars) __ 724 1,692 5,034 6,334 7,030 7,759 8,208 8,876 9.717
ImportjGDP ______________ (percentage) __ 47.7 54.1 50.1 49.1 49.7 54.9 60.3 61.2 62.9
Net Import-ExportjGDP __ (percentage) ---- 15.2 17.3 15.8 20.7 14.6 11.9 22.1 23.6 16.8

Source: Cornmonwealth of Puerto Rico, Planning Board, 1977 Economic RepOTI lo 'he GoveTnoT (San Juan).

and tubes are also significant. Most intermediate effective and/or beneficial to Puerto Rico because
goods imported were textile products used in the of the low poten tial local demando The commodi-
apparel and textile industries, and containers (e.g., ties in lhis category are motor vehic1es (8), heating
glass, metal, paper) used in the production and ship- and cooling machinery and equipment (9), and elec-
ment of Puerto Rican goods for export. tric household equipment (10). For example, a
strategy to promote import substitution by concen-
Table 2_Major Manufacturing ltems Shipped to Puer· trating on the local production of automobiles to
to Rico from .the United States (Calendar Year 1976) replace imported products would likely lead to fail-
ure. The automobile's high per unit cost has caused
Consumer nondurable goods:. (In thousands the high value ($297 million) of motor vehicIe im-
Food products:
1. Manufactured milk products (022.1,2) ______ 40,611
01 dollars) ports. However, the replacement of imported auto-
2. Bakery products (048.4) __________________________ 22,704 mobiles by local products (import substitution) would
3. Beer, ale, porter, stout (112.3) __________________ ._. _____ .___ 49,882
be a near impossibility due to the smaIl Puerto Rican
4. Prepared paints, enameIs, lacquers (533.3) __.. ____ _ 21,022 market,22 the diversified nature of the product, the
5. Cosmetics, other toilet preparations (553.0) ______ _ 39.183
6. Surface active agents, detergents, etc,. (554.2) ______ _
keen competition, and the degree of automation re-
Consumer durable goods: quired in lhe production process. 23
7. Rubber tires and inner tubes (629.1) _________________ _ 38,186
8. Motor vehicles (732.0, 8) __________________ _ 297,114 AIthough household furniture (11) is also a high
9. Heating and cooling machinery and equipment value-Iow quantity sales item-as in the case of
(719.1) ...._._..... _._ ..._.._ ........... _._. _ _ _._... 36.737
10. Electric household equipment (725.0) .. _. ___ .__ 46,474
household machinery and equipment-the industry
11. Furniture (821.0) _. ____ .___ .__ ..... _.... _.... ___ _ 60.701 is more labor intensive and less automated. Econ-
Intermediate goods: omies of scale may not be an important factor affect-
Textile products:
12. Yarn and thread of nonceIlulosic fiber (651.6) .... __ 27,531 ing its production growth. At present, the lack of
13. Cotton fabrics, woven (652.1, 2) ______ ... __ 97,852
14. Woven fabrics of noncellulosic tiber (653.5) _._...... 23,081 information precIudes any concIusion to be reached
15. Knitted or crocheted fabric, no elastic or rubber
653.7) .. _ _ _ _ _ _ _._....__... ____ _
on the import-substitution potential of this indus-
16. Miscellaneous made up articles of textile material try; therefore, it is cIassified in group VI below.
(656.9 .... _ _ _ _ _ _ _ .__...______ ._... 29,833 Group IV.--Commodities which do not warrant
17. Paper bags, boxes, containers (642.1) _.... _. ___ .. _. 43,925 a high priority in the goverrtment effort to promote
18. Containers and closures of glass (665.1) .. _.... _._
19. Metal containers, for transporting goods (692.2) _.
19,418 import substitution because of the poor competitive
prospect and/or the low contribution to Puerto
Note: Numbers in parentheses ( ) are schedule B codeso Rican income and employment. This group incIudes
Source: U.S. Burean of the Census, U.S. Trade with Puerto Rico aIl items in the petrochemical category listed in
and U.S. Possessions, FTSOO/Annual 1976 (Washington, D.C.: Gov-
ernment Printing Office), table 1. items 4, 5, 6.
The dec1ining competitive situation of the petro-
Import Substitution Potentials chemical industry has been weIl presented in the
Arthur D. Little study,24 and in Appendix B, Petro-
Based on the general conditions of Puerto Rican chemical Industry ProfiJe, of this report. In addi-
industries discussed in the previous chapters, the tion, the análysis in chapter IU has found that petro-
commodities identified in table 2 are tentatively chemicals and petroleum refinery products are
c1assified into the foIlowing groups: among industries characterized by a very high cap~
Group l.-Import substitution is likely feasible ital intensity, very little labor income, and a level of
because the local industries have aIready been estab- profit which is not sufficiently high to warrant a
lished and are competitive. Items belonging to this high cost of investment. AIthough the analysis is
group inc1ude bakery products (2) and malt liquors too aggregate to derive a precise concIusion on the
(3 ). feasibility of lhe expansion of the above-mentioned
Group lI.-Import substitution is likely feasible products, it is sufficient to deter the c1assification of
because of the strong aud growing local demando these industries to the list of high-priority import-
Furthermore, the required material inputs are either substitution items.
available locally or can be acquired economically Group V.-This group is represented by com-
from abroad. !tems in this category are concentrated modities in which import substitution can be im-
and condensed milk (milk products (1), and rubber proved by promoting interindustry linkages,25 but
tires and tubes (7). the profit prospect is too uncertain to warrant direct
The expansion of industries in group 1 and in the
establishment of industries in group II would require 22 See Section II conceming the economies of scale.
sorne government support. A more detailed analysis 23 This argument, of course, does not apply to the strategy to
produce automobiles by qualified companies for export market. The
of these industries wiII be provided in a later section. analysis concentrates on import substitution.
2l Arthur D. Little, Inc., Compelitive CasI Position 01 the Puerto
Group-llI.-Strategy to intensively promote im- Rican Petrachemical lndustry in 1977, October 1977.
port substitution for items in this group is not likely 25 See chapter VII.

and intensive government intervention. Textile mili been met by local industries. The local household-
prodncts (items Nos. 12 thru 16) are included in furniture industry reported a value of shipment of
this group. $48 million in 1972 (U.S. census). The value of
The textile industry has experienced a substantial furniture imports from the United States was $46
decline since the early 1970's. Employment rapidly million. U.S. goods have gained a larger market
and steadily decreased from 8,904 workers in 1970 share while the localindustry has experienced sorne
to 4,277 in 1976. The total Puerto Rican shipments decline in the subsequent years. On the other hand,
to the United States stood at $11.6 million in fiscal the glass-container industry has been expanding to
1976; two years earlier the number was $182.6 mil- meet the increasing demand, especially of local in-
lion. Such a large drop was caused primarily by the dustries. Also, many of the industries using glass as
urastic decline of the industry's main export compo- well as metal and wood containers for packaging
nents, i.e., yarn, thread, tire cord, and tire cord have increased the production of these items for their
fabric (schedule P Nos. 65113 and 65115), whose own needs.
shipment to the United States decreased from $161 As a whole, import substitution appears to have
million in calendar year 1974 to less than $10 million a good potential in this group. However, the insuffi-
in 1976. This period also witnessed a $47 mil- cient information has precluded any conclusion to
lion or 30-percent increase in the import of tex- be drawn at this time. Further studies are recom-
tile mill products, all of which originated from the mended to determine the import-substitution feasi-
U.S. mainland. 26 Puerto Rico's textile industry was bility of these individual items.
among the hardest hit industries in the 1973-75 re-
cession. Unfortunately, its recovery was hindered by Summary
the substantial increase in the industry's minimum
wages. 27 The aboye analysis identifies sorne industries
Despite these problems, the industry's condition which may be fe asible for import substitution, in-
is expected to improve and will be of significant c1uding mal! liquor, manufactured milk products,
importan ce to Puerto Rico for sorne time, mainly bakery products, and rubber tires and tubes. Further
because of the large potential demand for its prod- discussion of these industries is provided in section
ucts by the local apparel industry. Recent data show IV. The import substitution of motor vehic1es, house-
that Puerto Rican textile industry made a substan- hold machinery, and equipment is not feasible be-
tial comeback in 1977 as its sales increased 48 per- cause the local market is too small to warrant their
cent from the previous year to reach the level of efficient production. Special efforts to promote the
$175 million. 28 Furthermore, as found in chapter nI, substitution of paints, enamels, toilet preparations,
textile mill activities contributed substantially to in- and surface active detergents are also not advised at
come generating in Puerto Rico because a large per- this time due to the uncertainty in the competitive
centage of the industry's income is paid to Puerto position of Puerto Rico's petrochemical industry.
Rican workers. The social benefits of this industry The replacement of textile imports can best be im-
justify a certain government effort in its promotion, proved by a blanket policy to encourage the pur-
at least through the encouragement of tlíe local· pur- chase of local textile products by apparel plants
chase of its products. located in Puerto Rico. The market for local furni-
Most textile mili products are destined to serve as ture, paper, glass and metal containers, will grow aS
inputs to the apparel industry. As discussed in chap- Puerto Rico's population and industrial activities
ter VII, a large number of apparel firms are U.S. sub- grow. However, further studies are needed to deter-
sidiaries who purchase most inputs from their parent mine the economic feasibility of the import-substitu-
companies. A policy to improve interindustry link- tion program for these materials.
ages would effectively in crease the demand for local
textile products and enhance the substitution of
Group VI.-This group includes furniture (No.
11), and paper, glass, and metal containers used for
packaging and shipment of Puerto Rican products Beer
(Nos. 17, 18, 19). The demand for these items is The Puerto Rican beer industry holds a promising
growing and it appears that a significant portion has prospect for import substitution for the following
m Commonwealth of Puerto Rico, Economic Development Admirns- reasons:
tration, The Textile Mill Products lndustry in Puerto Rico February
1977. ' (a) The local beer industry is already well estab-
27 See chapter IV.
2f¡ Commonwealth of Puerto Rico, Planning Board, unpublished data
lished. Its operation is efficient and the prices of
frorn the CornmonweaIth's Income and Product Accounts, 1977. local beers being sold in the market are lower than

those of imported beers, either from me United taken primarily by the U.S. mainland brewers, in-
Sta tes or foreign countries. cluding Schaefer ethe leading company), Miller,
eb) The quality etaste) of local beer is con- Schlitz, Budweiser, Heineken, and El Tigre.
sidered highly competitive to imported beers. The tendency for large U.S. brewers to increase
ee) Local breweries can expand their present the domination of the market is not uncommon. The
production level without a significant cost increase United States once had more than 700 independent
in terms of capital investment. Seven years ago, the . breweries; today's number is only 48. There were 42
puerto Rican beer industry produced twice the breweries in Philadelphia two decades ago; only one
amount it does today. is left today. The small brewers have been hard hit
ed) The demand for beer by Puerto Ricans is by the increasing costs of grain, metal and glass for
expected to rise. Per capita beer consumption has packaging, and especially the hnge advertising bud-
increased consistently from 7.9 gallons per year in gets of the larger companies. The shift of public
1960 to 13 gallons in 1970 and 14.3 gallons in 1977. demand toward products of large companies in many
This level is, however, still substantially below the cases was simply due to the "images" they have
U.S. per capita consumption of 22 gallons per year. created through intensive promotion programs.29
ee) Although the imported beers have been gain- The general consensus among local business au-
ing in the percentage of the local market share, the thorities is that this is precisely the reason for the
competition between local and imported beer is so rapid deterioration of the competitive positions of
intense that small governmental efforts to promote Puerto Rican beers. The local beer indnstry now
local brewers can tilt the balance in favor of local faces a situation where it must expand to regain the
products. economies of scale in production or will be driven
out of business. The smaller market share would
Less than two decades ago, in 1960, the local
reduce the industry's budget and preclude it from
breweries supplied 95 percent of 18 million gallons
condncting expensive eand effective) advertising
of beer consumed in Puerto Rico. In the 1960--70
campaigns, or developing periodical market studies
period, Puerto Rico's beer consumption nearly
doubled, but most of the market gain was captured to anticipate any changes in consumer tastes.
Development Strategies.-In reviewing the local
by the United States and foreign beers, causing a
snbstantial decline in the market share of Puerto beer industry, any one or combination of the follow-
ing three measures can be arlopted:
Rican beers. As a result, in 1970, the supply of
Puerto Rican beer was reduced to 70 percent of the ea) Increasing the excise tax on all beers sold
market. The 1970-75 period witnessed a dramatic locally and using part or all of the revenue próceeds
50-percent decline in the absolute amount of local to assist the local brewers in their promotion efforts.
beer produced and sold, despite the continuous in- In fact, this measure was adopted in 1972. Nearly
crease in the local demand esee table 3). Pnerto half of the $ 8 million collected from the new excise
Rico's beer export to the United States, which was tax on beer was used to support local brewers in
never significant, stood at 21,000 gallons at a value marketing, advertising, quality control, and employee
of $50,000 in 1975. training programs through Fomento. The incentive
In fiscal year 1977, the Puerto Rican beer produc- program was abolished in 1976.3031
tion was 12 million gallons, sharing only one quarter eb) Requiring a mandatory deposit on beer con-
of the local market. The other three quarters were tainers sold locally. All "no deposit-no return"
bottles and metal cans are banned. This measure
Table J.-Beer Production, lmport, and Consumption has two important effects.
[Thousand wine gallonsJ '. Import substitution effect. The new regulation
will cause an increase in the handling cost for the
(United States Percentage producers andj or distributors of the imported as
Local and share of local well as locally produced beer. While it is possible
Ye", production foreign) Consumption 1 production
that this increased cost would be covered by the
1960 ... 17,614 864 18,478 95.3
1965 23,609 2,760 26,369 89.5
savings in material cost for local brewers eas a result
1970 24,755 10,541 35,296 70.1
1971 15,651 29 See, The Washington Post, "Local Distributo! Helping Strohs to
21,980 37,631 41.4
1972 18,793 22,534- 41,327
Compete," September 26, 1978, p. E-l,
45.5 30 Caribbean Business, "We Want Our Market Back," Nov. 10,
1973 21,517 20,360 41,877 51.4
1974 -'----_. 11,984 25,679 37,663
1977, p. 1.
1975 12,776 31 At the final writing of this reporl (May 1978), the Administration
25,847 38,623 33.1
1976 ~::=:== 15,775 25,437 41,212 38.3
has proposed a bill whieh wouId inerease the local exeise tax on
1977 _-
----,_... 12,233 34,563 46,796 26.1
beer by 55 eents a gallon (or 5 to 6 eents per can or botde at
retail prices). The tax, however, would only apply to brewers pro-
1 Consumption = Local Production + Import; Export i5 negligible. dUcing 31 million gallons or more annualIy. Thus the isIand beers
would not be affeeted _by the new tax inerease. TItis bill. however.
Source: Junta de Planification de Puerto Rico, Informe Economico is subject to constitutionality challenge. (San Juan Star. May 27~
al Gobernador 1975 and 1977 series. 1978).

of using the returned containers), this is not the of the island's population-living in the United
case for the importers. The long distance to their States, 58 percent of whom were island born. Out
home breweries means a substantial increase in the of the total, over 1 million live in the New York-
transportation cost and a reduction in their com- New Jersey area and 80,000 in Chicago. This con-
petitive edge. The importers may of course choose to centration provides a very favorable condition for
seIl the returned containers to a local recycIing plant the promotional efforts.
(at low price). The savings on material, however, The promotion mechanism for mm is welI estab-
is unrealized and the benefit of the new regulation lished in the U.S. mainland by Fomento. The cost of
remains with the local brewers. adding the beer promotion campaign to the current
mm advertisement program would not likely be
• Environmental effect. The disposal of aluminum
cans and glass bottles has been a major environmen-
tal concern for years. In early 1977, two States, A substantial financial return to the government's
contribution to the industry's advertisement cam-
Oregon and Vermont, adopted provisions for man-
paign expenses is almost guaranteed by the expected
datory deposit requirements on beverage containers.
increase in the refund of U.S. excise taxes. Current
Severa! counties, incIuding Fairfax County of the
law provides that excise taxes collected from Puerto
Washington, D.C., metropolitan area, have issued
Rican products sold in the United States be returned
similar reguIations for soft drink containers. Other
States (e.g., Maine, Massachusetts, Colorado, and to the CommonweaIth's treasury. There is an excise
tax of $9 per barrel of beer sald in the United
Michigan) are considering the adoption of such reg-
ulations.'2 These regulations, if adopted, would safe- States· 7 If Pnerto Rico can capture only one-
thousandth of the U.S. market, it would net 170,000
guard the beauty of Puerto Rico and continue to
barreis in sales per year, and the excise tax return
provide a favorable atmosphere for the growth of
tourism. to Puerto Rico would be more than $1.5 million
(minus U.S. Government's expenses).s8 AIterna-
(e) Encouraging and assisting the loca! beer in- tively, if the one million Puerto Ricans living in the
dustry to expand to the U.S. mainland market. The New York-New Jersey area use 25 percent of the
large sales volume would increase the economies of amount of money that was spent on U.S. and foreign
scale and reduce the industry's per unit cost of pro- beer to purchase Puerto Rican beer, 180,000 barreis
duction and distribution, which in turn would heIp will be sold and the Puerto Rican treasury would net
the Puerto Rican beer industry to be in a better abaut $1.6 million in excise tax returns.'"
competitive position in the local market. This strat- These are probably conservative figures. As the
egy is consistent with optimum long-term devel- product gains consumer familiarity, and continuous
opment goal of fostering import substitution and marketing studies help to modify the beer formnla,
export expansion simuItaneously.33 if necessary, to better suit the U.S. consumer's taste,
As stated aboye, the U.S. beer market is highly and to enable more effective advertising campaigns,
competitive. Most of the smaIler brewers have the sales of Puerto Rican beers can increase
dropped out in the past decades, giving way to a few manyfold.
large national brewers. On the other hand, the U.S. Conclusion.-The above discussion attempts to
beer consumption has been increasing steadily·4 show that the market condition appears favorable
Foreign beers have taken advantage of this trend for the import substitution and export expansion of
and captured a record gain in the past years· 5 Many the Puerto Rican beer industry. Among the three
smaIl regional brewers have also successfuIly com- measures to promote the industry, the first meas-
peted in the U.S. markets.s 6 There is a reasonably ure-i.e., the increase in excise taxes-appears in-
good prospect for Puerto Rico to export beers to ferior to the latter measures. The increased tax
the United States for the foIlowing reasons: would cause an increase in the price of beer that
wilI be passed on, in whole or in part, to local con-
With innovative advertisement and promotional sumers. Furthermore, this measure of "protection"
procedures a substantial volume of Puerto Rico's constitutes an "inward looking" policy which does
beer can be sold to Puerto Ricans living in the U.S. not encourage efficiency.4o
mainland. The 1970 population census shows nearly FinaIly, it should be kept in mind that the purpose
1.4 million Puerto Ricans-equivalent to one-half of this analysis is to provide an example of many
32 U.S. Department of Cornmerce, U.S. Industrial Outlook 1977 industries in Puerto Rico in which the impor! sub-
(Washington, D.C.: U.S. Government Printing Office), January 1977.
33 See section on Paliey Implication. .'17 A $7 per barrel tax rate applies to the fust 60,000 barreIs of
34 Per capita consumption far the 21-years-and-over age group rose beer oí a brewer who produces not more than 2 million barreIs oí
fram 33.1 gallons in 1974 to 34.2 gallaDs in 1975. beer per calendar year.
35 The sales of imported malt liquor rose fram $70 millian in 1974 .'18 See chapter VI.
to $176 million in 1976. .'19 Based on the U.S. average oí 22 ga1lons per year.
26 For example, see "Local Distribution Helping Stroh's to com- 40 See section on Theoretical Consideration and International expe-
pete," Washington Post, March 25, 1978. rience.

stitution strategy can be promoted in conjunction cre~mgapidly as a result of intensive government
with export expansion, i.e., the short-term self- efflti;''¡ develop the island's agricultural activities.
sufficiency and long-term industrial-expansion goals In , milk was the number one sector in agricul-
are pursued simultaneously. The analysis does not ture, producing $146 million and employing sorne
contain sufficient informatiou to serve as a feasibility 20,000 people in direct and indirect jobS. 42 The
study, nor does it so intend. Additional investiga- development process, however, was nearly stalled by
tion must be conducted on the U.S. market demand a low demand for milk by local sources, causing an
as weIl as the economic impact of the measures used excess production of 30 million gallons in 1977. The
to promote such a strategy. excess was purchased by the Commonwealth Gov-
ernment at a below-cost price, resulting in a $4.7
Manufacfured Milk Products million loss to local dairy farmers. Nevertheless, the
Puerto Rican import of milk products from the governmeut's net cost of subsidizing the milk indus-
United Sta tes consists mainly of evaporated milk, try amounted to $1 million per annum.
condensed milk, cream, and nonfat dry milk. (Sched- Attempts to sell Puerto Rican milk to the Army
ule B 022.1 and 022.2, SIC code 2033.) The value and federally funded school lunch programs have
of shipments fluctuated around the average of $32 failed due to the relatively low quality of local milk.
million per year from 1970 to 1975, then rose The Department of Agriculture is now forced to im-
sharply to $40 million in 1976 41 plement means to decrease the production. Whether
At present, the milk-processing industry is virtu- the Department is successful or not, the local milk
ally nonexistent in Puerto Rico. A program to suc- industry in particular, and the agricultural sector in
cessfully manufacture milk products locally will not general, will suffer sorne irreversible damages. Con-
only decrease the outflow of the dollars but also help versely, if the demand for local products can be in-
stimulate the development of Puerto Rico's agricul- creased through the establishment of a sound milk-
tural sector, through the newly created demand for processing industry, the local dairy farms will
whole milk. The following sections will briefly continue to be a growing source of income and
discuss the availability of materials and other fac- employment for Puerto Rico in the years to come.
tors aflecting the development of such a programo Economies of Scale.-Generally, a firm which
produces a relatively larger quanticy of output would
Materials.-A survey of the production charac- experience a lower per-unit cost and, as a result,
teristics of the U .S. condensed and evaporated milk can better compete in the open market. The firm's
industry shows that nearly aIl the materials required quantity produced, however, is limited by the size of
for the production of milk products, except for cone the market. An initial investigation of the Puerto
tainers and supplies, are whole milk and milk deriva- Rican consumption (potential demand) and the
tives. Specifically, 45 percent of the total costs of economic size of milk-processing plants in the United
material consumed is from whole milk, 23 percent States shows that the economies oí scale do not ap-
from milk products, and the remaining 31 percent pear to be a significant constraint to the establish-
of the cost is from the purchase of containers, sup- ment of a milk-processing industry in Puerto Rico.
plies, and other materials. See table 4. The 1972 U.S. Census shows that the firms rating
Puerto Rico's whole-milk production has been in- third most efficient in plant size (measured in terms
4l Calendar years. SouTce: U.S. Departrnent of Commerce, U.S. of value added per dollar of payroll) were those em-
Trade wíth Puerto Rico and U.S. Possessions, op. cit.
ploying between five and nine workers. These firms
Table 4.-ProductionCharacteristics vf the U.S.
produced an average of $503,125 per year. See table
Condensed and Evaporated Mi/k lndustry, 1972 5. Such an output is equivalent to less than 2 percent
of the current Puerto Rican purchase of manufac-
tured milk products from the U.S. mainland. 43
of da11ars) Percentage The group which employed 20 to 49 workers has
Material consumed: 1,026.1 100.0 the largest number ofestablishments, producing
Whole miIk __._......_........___ ' ____ .____ .__ 462.5 45.1 $4.67 million each on the average. This amount is
Fluid skim milk _... ____._.__________________ 31.6 3.1
Cream ____. ____.___ .._______ ~ ____. __.__ 26.1 2.5 17.5 percent of the current local purchase of the
Butter ..___.._..____._______.,____ .. _.._____...__.___ (1)
Condensed and evaporated milk ____ ....._.___ 57.3 5.6
Dried milk _______ .. _________ .___ .. _.... _.... ___ 102.1 10.0
Natural cheese ._...._...._ ..._................ ___ 2.8 el Interview with Puerto Rican Secretary of Agriculture in "Agricul-
Ice rnream, sherbet, and ice rnilk (1) i~;~. Plan A Success for First Year," Caribbean Business, March 16,
Sugar _ ..._ ........_....._ .............._....... _ 16.4 1.6 .la The current (1977) purchase of condensed and evaporated milk
Other materials, containers, supplies ...... 319.1 31.1 i5 $39,756,000. Deflation of tbis amount based on the dairy product's
VaIue of shiprnent .._._. __________ . ___ ._..... _... _._. ___ 1,667.8
price increase of 49 percent from 1972-77, would bring it down to
(1) Withheld to avoid disc10sing figures for individual companies. $26,681,879 in 1972 prices; $500,000 is 1.87 percent of this deflated
amollnt. The inflation rate of dairy products is obtamed from the U.S.
Source: U.S. Department of Cornmerce, Bureau of the Census Department of Commerce, Bureau of Economic Analysis, Business
1972 Census of Manufactures, Volume JI, 1ndustry Statistics, SIC--2023: Statistics series.

Table 5.-Condensed and Evaporaed Milk, Production "dry" bakery products, inc1uding biscuits, crackers,
Statistics by Emplayment Size Di Establishment, cookies, and similar items. These two categories
United States, 1972
are c1assified under SIC codes 2051 and 2052,
Number of Number of Value of shipment Value added respectively.
employees establishments per establishment per employee The U.S. shipments of all bakery products to
1-4 _________________.. __ 37 $140,540 $3.33 Puerto Rico were reported at a high level of $22.7
5-9 ______________ ...__ 32 503,125 3.83
10-19 ______ ._______ 51 1,364,706 3.35
million in calendar year 1976. 44 Foreign imports are
20--49 _____________ 89 4,699,663 3.39 estimated to add approximately 15 percent to this
50-99 _______________ . 49 8,585,714 3.00
100-249 ________________ 20 26,390.000 5.61 total. 45 The local bakery products market, while
250-500 _____________ 5 106,400,000 6.19 historically controlled by Puerto Rican manufac-
Source: U.S. Department of Commerce, Bureau of the Census, 1972
turers, has become a large and increasing source of
Census of Manufactures, Volume ll. Industry Statistics. SIC 2023, p. income for offisland producers.
20, B~12. This section will examine Puerto Rico's bakery
products industries, and suggest policy options to
Thus, if the technology being used in the Puerto improve the competitive conditions of local produc-
Rican manufactured-milk production is compatible tion and encourage import substitution in this
to that of the United States, a 20-percent share of market.
the local market would be sufficient for an estab-
lishment of a plant employing 20 to 49 workers, or Puerto Rico's Bakery Products Indnstry and
several plants employing 5 to 9 workers. Market.-The bakery product industry of Puerto
In snmmary, this section has briefiy examined tbe Rico has steadily declined in the past two decades,
characteristics of the milk-processing industry and contrary to the rapid growth of the island's manu-
the benefits of establishing such an industry in Puerto facturing sector as a whole.
Rico (to substitute for imports and stimulate agri- In 1958, there were 270 establishments producing
culture). The findings justify further study to provide bakery products in Puerto Rico. By 1972, only 98
a detailed examination of the production require- were reported in operation. While outputs experi-
ments, determine the marketing and distribution enced a rapid growth prior to 1972, employrnent in
strategies, and develop a plan to pro vide necessary the industry as a group reported no growth from
incentives to attract and promote initial investments. 1958 to 1963, and substantially decreased thereafter.
See table 6.
Puerto Rico's bakery products industries have also
Bakery Products experieneed a dec1ining competitive position against
GeneraI.-The two major categories of bakery foreign imports. In a 7-year span, 1968 to 1975,
products are: (1) "perishable" products, such as foreign imports increased tenfold. As a percentage
bread, buns, cakes, doughnuts, pastries, etc., and (2) of U.S. shipments, foreign imports rose from 3.5

Table 6.-Bakery Products Industries Di Puerto Rico

All bakery producís Perishable products Dry producís

1958 1963 1967 1972 1958 1963 1967 1972 1958 1963 1967 1972
Number of establishments _____________ 270 223 202 98 263 212 189 86 7 11 13 12
Employment ________ .. ________ 2,483 2,483 2,053 1,923 2,157 1,950 1,936 1,354 326 533 567 569
Value of shipments _~ (thousands of
dollars) ------------------_... 18,348 25,547 32,727 34,478 43,946 18,384 23,779 23,483 4,402 7,163 8,948 10,635

Source: U.S. Bureau of the Census, Economic Census of OutIying Ateas, Puerto Rico: Census of Manufactures, 1972. (Washington, D.C.:
Government Printing Oflice, 1974).

Table 7.-ShiPments Di Bakery Products from percent to 16.3 pereent in the periodo In 1975, im-
United States to Puerto Rico ports from the Netherlands ranked the highest witb
[In thousands of dollars] $938,470, followed by Colombia ($408,842) and
1958 __- - - -..--.--- $2,523 1973 .__ ~_~ _ _ .__ .... $11,121
Dominican Republic ($350,418). See table 8.
1963 ___________ ~~ 3,519 1974 _______________ 13,181
1967 _______________ 6,228 1975 ______________ 16,551 44 u.s. Department of Commerce, Bureau of the Census, u.s. Trade

1971 _________________________ 7,532 1976 ______.. _________ 22,703 with Puerto Rico and U.S. Possessions, FT 800/Annllal 1976, (Wash~
1972 ~ _______ ~ ____ 9,625
ington, D.C.: Goverrunent Printing Office).
45 Based on the Puerto Rican Planning Board, External Trade Sta-
Source: U.S. Bureau of the Census, U.S. Trade with Puerto Rico tistics, which reported in fiscal 1975, imports of bakery products from
and U.S. Possessions, Ft 800/Annual, various years, (Washington, foreign countries amounted to $2.493 millien, or 14 percent of $15.289
D.C.: Government Printing Oflice). million imported from the United States.

Table 8.-Import of Bakery Products from erated, causing the absolute level of bakery goods
Foreign Countries, 1968 and 1975 and shipments to more than double, reaching the
(In thousands of dollars) record level of $22.7 million in 1976. See table 7.
Percentage The gain in foreign imports of bakery products
1968 1975 mcrease shown in table 8 can be large1y attributed to lhe
Argentina __ ,___ ._._.... ___.. _. ________ '_ (') $1,330 (') U.S. Government's liberal trade policies and increas-
Gelg~llm and LuxeIpbourg ...._____ _ $14,747 147,109 897.5 ing Puerto Rican labor costs. For example, the ayer"
Brazil _. __.. ________________.______.'__. (') 102,235 (')
Canada ___ .__._.. __... __________ . 8,617 27,955 224.4 age wage rate in Colombia is $0.46 per hour and in
Colombia _________ .__ .. __________ _
Denmark ________________ __o (')
Argentina is about $0.66. The minimum wage of
Dominican Republic · ___
France ._,_______.___._______..__
0 __••_ ••_ •••
840 350,418 (') $2.65 per hour is required to be paid to workers in
6,477 12,849 98.3
Hong Kong _. __......___ ' ___________._ (') 24,535 (') Puerto Rico's bakery-products plants. In addition,
Italy ..._____ ._...._____ .. ___ ' ..________ ... (') 1,813 (') under locallaws, lhe companies are required to pay
Netherlands ._____ ._._.. ______ ~ ___ 46,056 938,47(} 1,937.6
Spam ~ ________ ._ _ ~_ 5,344 13,786 158.0 each worker 15 days of vacation leave per year, 10
Trinidad and Tobago __ .. _ _._ 3,717 6,585 77.2
United Kingdom ______________ _ 102,285 203,979 99.4
days of sick leave, workmen's compensation, medical
Venezuela _______________________ _ (') 49,700 (') insurance, and 2 percent of annual salary payable
Finland _______________________________ _ 3,217 (') -100.0
West Germany _____________ .__ ___ _ ~
922 (') -100.0 to all employees as a Christmas bonus. 46
Yugoslavia _____________________ _ 774 (') -100.0
Total _____ ~ _______________ _ Import Substitutiou Prospects aud Policy.41-
231,197 2,493,261 978.4
Prospects.-The large diffcrence in labor costs de-
1Negligíble. scribed aboye would make it tremendously difficult
Ver¡ large, undefined.

Source: Puerto Rico, Planning Board, External Trade Statistics, for the island to "substitute" for foreign imports. As
1968, 1975 (fiscal years). an initial effort, import substitution policy should
The reasons for such a decline in employment, concentrate on regaining the local market share from
and a slow growth in output are mixed. They range U.S. producers. However, the productivity of !he
from the insufficient atlention offered the industry Puerto Rican bakery products industry was consid-
by the government, the local producers' lack of erably lower than that of its U.S. counterpart. In
knowledge in modern marketing techniques, the stiff 1972, value added per Puerto Rican worker was
competition of U .S. and foreign imports, and the $8,438, an amount equivalent to 44 percent of the
increase in wage rates which this labor-intensive average U.S. worker's productivity ($19,357); how-
industry will only slowly absorb through efficiencies ever, Puerto Rico's low average wage rate (by U.S.
in its other factor costs or productivity increases. standards) increased the island's value added per l'
The primary emphasis of the government's "Oper- dollar of payroll to 88 percent of the mainland's.
With the majority of Puerto Rican workets receiving II
ation Bootstrap" was to encourage the production of I!
cornmodities for export markets. Most export indus- pay at the minimum statutory level, the gap between
the U.S. industry's value added per dollar of payroll li
tries, such as apparel, lealher products, chemicals, 'l·
etc., received government assistance, tax exemptions, and that of Puerto Rico is expected to widen, hence '1

and other financial and facilities supports. Bakery the island's competitive position worsened.
industries, on the other hand, oriented their prod- 48 Ins~tute of Intemational Law and Economic Development.
EconomlC Effects of Federal Programs and Policies in Puerto Rico, '~¡"
ucts to meet local demands, and historically received A Report Prepared for the U.S. Department of Commerce Economic
relatively little attention from the government. More- Development Admin1stration, June 1978, vol. III, ch. IV. '
4'7 Except as otherwise specified, information in this section was ob-
over, these industries are largely owned and man- tained through cliscussions with Puerto Rican bakery-goods producers.
aged by Puerto Ricans. They are not U.S. subsid-
iaries, and have neither sufficient knowledge nor fa- Table 9.-Bakery Product Industry inthe
cilities to expand to the highly competitive export United States and Puerto Rico (1972)
markets. P.R.!

On the other hand, competition from abroad has U.S. 1,'

increased substantially. U.S. mainland producers, be- (per- ;1

~ause of their large advertising budgets, have asserted Puerto United cent- "

mfluence to shift local consumer preference to main-

land products. High capital investments also enable

Value added (in thousands of dollars) _ 16,226


Employees (number) _. ___________ 1,923 235,500
these producers to increase labor productivity which Payroll (in thousands of dollars) ___ 8,249 2,037,500
Value added/employee (in dollars) _~__ 8,438 19,316 44
helps absorb the extra transportation cost to Puerto Value added/payroll (in dollars) _ _ 1.97 2.23 88
Ri~o. As a result, U.S. producers have consistently
gamed larger shares of the island's market, and in- Sources: U.S. Bureau of the Census, Census of Manufactures 1972
Volwne IJ-Industry Statistics, (Washington, D.C.: Government Prínt:
creased the levels of U.S. shipments from $2.5 mil- ing Office).
lion in 1958 to nearly $10 million in 1972. In the U.S. Bureau of the Census, Economic Census of Outlying Ateas
Puerto Rico: Census of Manufactures, 1972, (Washington, D.C.;
following 4-year period, lhe rate of increase accel- Government Printing Office).

and tubes imported from the United States was $6.5 tubes products shipped from the United States by
million in 1958. It doubled in the 1958-67 decade items in FY's 1968 and 1975. Passenger car and
and tripled in the following decade. By 1976, the cycIe tires accounted for 65 percent of the total
total value of these products shipments stood at value of shipments in 1975. Together with truck and
nearly $40 million. Imports from foreign countries bus tires, they accounted for $25 million, 85 percent
added approximately 10 percent to this totaPO of the total U.S. shipments of tires, tubes, and prod-
Table 11 shows the breakdown of the tires and ucts to Puerto Rico.

Table ll.-Shipments of Tires, Tubes, and Products From United States to Puerto Rico, FY's 1968 and 1975
Schedule Percentage
B Description FY 1968 FY 1975 increase

6291010 Passenger car and cycle tires, pneumatic ____________________ .. __ _ $8,254,327 $18,745,138 127.1
6291020 Truck and bus tires, pneumatic _________ ._______________________ _ 3,113,632 5,467,057 75.6
6291030 Off-the-highway tires, pneumatic _____ "____________________ .. _____ _ 711,911 1,070,999 50.4
6291040 Aircraft tires, pneumatic.. __________.__.._________________ _ 127,515 56,009 -56.1
6291050 Tractor implement tires, pneumatic ___ ._____________________ 418,267 1,092,391 161.2
6291060 Other vehicle pneumatic tires __________ ". ___________.___________ _ 29,848 72,353 142.4
6291070 Salid cushion vehicle tires ____________ .__________________ .______.____ ___ _
158,317 89.795 -43.3
6291080 Inner tubes for vehic1es ________________________________________________ _ 711,404 1,069,099 50.3
6291090 Tire flaps ___ .... _________________ ._. ___ .. ______ .______ ._________.______ .__ _ 31,848 14,638 -54.0
6210220 Tire sundries and repair material __________._. _________________.________ _ 240,689 96,480 -60.0
6210230 Tread rUbber, camelback __ .... _____________ ~. ____________________ _ 889,391 842,240 -5.3
Total ________________ .___________________._____________.____ ______ _
14,687,149 28,616.250 94.8

Source: Puerto Rico, Planning Board, Extemal Trade Statistics, 1968, 1975.

Puerto Rico's imports Oof tires, tubes, and products the production of automobile tires. The letter stated:
from fOoreign cOountries were also dOominated by items "It is estimated that this project alone (automotive
fOor automobiles and trucks, i.e., 55.6 percent were tires) wiIl gener3il:e sorne 2,500 direct jOobs." 51
passenger car tires and 38.1 percent were tires fOor
trucks and buses. However, 4 years later, in 1972, when the last
econo.mic census was conducted, the industry record-
Table 12.-Imports of Tires, Tubes, and Produc.ts From ed on1y a few dozen people employed in the entire
Foreign Countries, FY 1975 tiresand inner tubes industry group withthe total
Value Per- output of less than $300,000.
centage FUDther efforts to promote the expansion of the
Itom 1968 1975 increase
tires and tubes industry in Puerto Rico sho.uld con-
Passenger car tires ________________ _ $388.187 $2.788.994 618
Truck and bus tires _________.___ _ 318,735 1,910,636 499
sider the fOllowing factors:
Others _______________________ .. _ 640,508 313,937 -55
Total ________ .. _______ ._____ 1,397,430
a. There has been and will be an increasing de-
5,013,937 259
mand for and market share of radial ·tires. In 1970,
Source: Puerto Rico Planning Board, External Trade Statistics, the radial passenger car tires represented only 2 per-
1968, 1975, cent of output in the United States. In 1976, the
output share was 40 percent. The U.S. Depart-
Tables 11 and 12 aboye show that, in addMtion to ment of Commerce has predicted that radial tires
the large volume, the combined offisland purchase
wiII continue to gain in market share, but at :;t reduced
of automobile and truck tires (from United States and rate in the future. 52
foreign coulltries) increased at rapid rates. Therefore, b. The industry is very energy-sensitive. The higher
initial efforts to promOote the import 'Substitution of cost 'Of energy causes bOoth a decrease in the demand
tires, tubes, and products wOould Iikely provide a high for aUlto.motive tires and an increase in the cost of
return if concentrated on these items. supplying the product.
The establishment Oof -a strong automobile tire in-
dustry in Puerto Rico has been of interest to the On the demand side, rthe higher gasoline prices
Commonwealth Government for many years. In a would cause consumers to. purchase lower weight
Imter 10 the Federal Maritime Commission, in 1968, automobiles and fewer automobiles, reducing the
Iisting several goods which are essential to the indus- quantity o.f tires demanded. On the .supply side, the
trialization program Oof Puerto Rico, the EDA in- higher energy cost increases the cOosts of petrochem-
cIuded processed natural or synthetic rubber and ical products used as principal inputs in the produc-
carbon black These two materials are essential for 5l. Federal Maritime Commission, Puerto Rican~Vjrgin IsIands Trade
Study. 1970 p., 198.
50 Based on the data from Puerto Rican Planning Board, External 52 U.S. Department of Commerce, U.S. Industrial Outlook 1977.
Trade Statistics, 1975. (Washington, D.C., U.S. Government Printing Office, 1977), p. 160.

tion 'Orf tires and tubes (incIuding synthetic rubber, d. Economies of scale isan important factor. Ac-
tire cord, carbon black, etc.). See table 13. cording to the company financial reports, lhe five
largest tire manufacturing and distrlbution firms, with
Table H.-Material Consumed by U.S. Tire ando sales of $11 billion, had net profits amounting to 5
Tubes Industry, 1972 percem of sales in 1976. Five smaller companies,
which had total sales of $3 million, reported the net
(millions of Percentage
profitjsales ratio of on1y 1.5 percent. The US.
dOllars) of total Department of Commerce conduded that "it is very
Natural Iubber ____________________________ _ 186.7 8.6
difficult for lhe smaller companies to expand or
Synthetic Iubber _________ ____________ _ 651.5
30.0 modemize facilities when returns on sales and invest-
Rubber processing chemicals ___________________ _ 99.8 4.6
earban black _______________________________ _ 14