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Puerto Rico Pays Heavily For

Mainland's Recession
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By Michael Stern Special to The New York Times

March 22, 1975

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SAN JUAN, P. R., March 21 —Puerto Rico is importing a massive

dose of the United States recession, and paying for it is forcing
equally massive austerities on the people and Government of this
sunny, productive but deeply troubled island commonwealth.

Yesterday, Gov. Rafael Hernandez Colon sent a 1975–76 budget of

$1.3-billion to the Legislature. The budget is designed to bring
spending in line with falling income by withholding $100 - million in
scheduled pay increases from public employes and imposing $94-
million in further cuts on every department of Government.

These measures come on top of a tax surcharge that was imposed

retroactively on 1974 incomes, a 5 per cent excise on all imports
except food and the dismissal of 1,600 Government employes,
actions taken to close a $200-million deficit opened by recession
and inflation in this year's budget of $1.5-billion.

Two days ago, in a San Juan supermarket, Mrs. Emilio Bonilla, wife
of an out-of-work plumber, began to cry after she slapped her 3-
year-old son for opening an 88-cent bag of cookies she had not
meant to buy.

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“Look,” she told the manager when he asked what was wrong.
“That's what I have for a whole week for four of us.” Her
outstretched hand held crumpled bills and change adding up to
$7.52. Then she blushed with shame, picked up her son and ran out
of the store.

Mrs. Bonilla's husband is one of the 149,000 islanders who, were

officially counted as unemployed in January, a total that produced
an unadjusted jobless rate of 17.1 per cent, almost double the United
States rate of 9.0 per cent. The real rate, when the long-termed
unemployed who have given up looking for work are counted in, is
variously estimated at from 22 to 35 per cent.

For the jobless and for the working population, inflation is

widening the usual 25-per-cent difference between mainland and
island prices. Puerto Ricans pay $1.22 for a dozen grade-A large
eggs, $1.59 for a pound of hamburger meat, 65 cents for a two-
pound package of flour and $1.92 for the five-pound bag of sugar
that was refired here from cane grown on the island's plantations.

These public and private troubles are making many Puerto Ricans
question the assumption of “Fomento,” the development program
that in 25 years has transformed Puerto Rico's poor agricultural
economy into a relatively prosperous industrial society.

The reassessment is prompted by the realization that

industrialization has tied Puerto Rico as closely to the mainland
business cycle as New York, Michigan and California are tied to it.

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Ninety-eight percent of all the food, raw materials and

manufactured goods consumed here are imported from the
mainland and 85 per cent of the island's exports go to the
mainland.

Interviews with Government officials, labor leaders, businessmen

and bankers revealed a broad consensus that Puerto Rico would
not pull out of its slump until the United States pulled out of its
recession, and may even lag behind the mainland upturn predicted
for later this year. The realization has been a sabering one, because
the turndown here comes after 10 years of steady growth that was
hardly even slowed by the 1969–70 United States recession.

Incomes in Puerto Rico have been rising, though they are still well
below United States levels. The average weekly wage at the start
of this year was $81.50.

Nevertheless, the pattern of migration in recent years has been

toward the island from the mainland. In 1972, 33,596 more people
came here than left. In 1973, the net inflow rose to 34,492. Last year,
the net inflow fell to 18,378, but officials of the Puerto Rican
Planning Board, who compile the figures, say they cannot relate
the drop to the heavier impact of the recession here.

Tomento' Is Questioned

Average Income $81.50

Though half the population; of three million lives in metropolitan

San Juan, industry is scattered throughout the island. Jose Rivera
Janer, deputy director of Fomento, points out that when a factory
closes in a small town, the effect on the population can be
disastrous.

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He cited the closing last year of the Fibers International plant of

Phillips Petroleum in the town of Guayama, which put 2,300 people
out of work. “When you consider that three other jobs depended on
every job in the fibers factory, you can see what this meant for a
town of 36.000 people,” Mr. Rivera said. “It is a real crisis, a
depression on a local level, and it has happened elsewhere.”

From last June to February of this year, 53 enterprises sponsored

by Fomento have closed. But Mr. Rivera said that new enterprises
were still being created. completed arrangements for 175 new
plants to open on the island, with a potential of 9,000 new jobs. For
the comparable period in 1973–74, the figures were 200 new
enterprises with a potential of 11,000 jobs.

In the same months Fomento

Among the companies setting up here are Hoffman-LaRoche, Inc.

the Swiss pharmaceutical concern, which is investing $50-million
in a plant to pro duce tranquillizers with a work force of 300.

“These figures show that the recession has slowed our job creation
efforts, but it has not stopped them,” Mr, Rivera said.

The principal lure Fomento uses is exemption from all taxes for
from 10 to 30 years. depending on where a company settles. In
addition, it offers grants for installing new machinery, job training
and factory buildings at rents of 75 cents to $1.75 a square foot.

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To revive recession-slowed interest in the island, Governor

Hernandez Colon has liberalized the incentive package with a 25
per cent wage subsidy. It will be offered to companies that open
plants with 500 employes or more and keep the plants working for
at least two years.

This proposal has been attacked privately by some former

Fomento officials as too liberal and publicly by Carlos Romero
Barcelo, the mayor of San Juan, as self-defeating.

“Such programs are like quicksand,” Mr. Romero said “The deeper
we get into them, the harder it will be to get out of them. A
company that doesn't pay taxes has no feeling of belonging to the
community, and in the long run it will do Puerto Rico no good.”

Mr. Romero, a leader of the New Progressive party, is expected to

run against the Governor, a Popular Democrat, in the election next
year.

“What has been the result of all these tax incentives,” Mr. Romero
asked in an interview. “Companies come in, but when the tax
incentive ends. they move away. They don't bring any permanent
good to the island. And they [the programs) create cross conflict
and feelings of jealousy because they are not offered to native
businesses.”

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Fomento officials conceded that some companies, principally

apparel companies with low capital investment, had moved away
after their tax exemptim ended. But they insist that most of the
2,000 factories estab. lished here under Fomento auspices have
remained and have earned new exemptions by creating new
product lines i?? new factories.

Investment Incentives

Some Moved

Juan Albors. the Commonwealth Secretary of State, save the

exemptions co remove from the tax base enterprises that
elsewhere help to defray the cost of government. But without them,
he said, there would be no reason for many mainland companies to
set up here. And the jobs and economic activity created by the new
enterprises bring in other tax revenues that the commonwealth
would not have had.

The Government's principal sources of income are the income tax,

real estate levies and the excise on imported goods and raw
materials. Recession dropped the yield of these revenues sharply
last year and at the same time inflation and the rising cost of
imported oil increased expenditures.

“Our budget problem here was fundamentally the same that faced
many state governments on the mainland,” Mr. Albors said. “And
the measures we have adopted are similar to those they are
taking.” The surtax has been enacted for 1974 incomes and for 1975
and 1976 as well. It is sharply graduated, rising from 1 per cent on
net taxable incomes of $1,000 or less, to 5 per cent incomes of
$12,000 or more.

Mr. Albors said that the Government hoped that much of the $94-
million in new cuts in the 1975–76 budget could be avoided if more
Federal aid were appropriated by Congress.

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“But if such aid doesn't happen,” he said, “every department is on

warning that it will have to achieve economies the best way it can.”
The new budget makes no provision for an additional $48-million in
oil costs anticipated as a result of an order from the Environmental
Protection Agency in Washington to the power au thority here to
start burning more expensive low - sulphur fuel oil. The
commonwealth has appealed to E.P.A. officials in Washington to
delay implementation of the order, which was issued this week.

While the Government proceeds with its austerity program,

opposition is mounting. The Teachers Federation has threatened
selective strikes to force payment of the wage increases that have
been rescinded. And the small Puerto Rican Socialist Party has
begun holding railies in many cities to urge people not to pay the
higher income tax.

Here in San Juan the tourist season is ending, with gaiety among
visitors but gloom among the hotel keepers. The recession and a
70-per-cent increase in air fares from the mainland has dropped
hotel occupancy this season 16.7 per cent below the record level
last year and the number of visitors has fallen 8.1 per cent.

Assessing the future, Hector Ledesma, executive vice president of

the island's largest bank sees a bright tomorrow for Puerto Rico
once the recession is past.

“We have the potential here to become the distributive center for
the whole of the Caribbean.” he said. “And we also can become the
financial capital, serving those companies and needs that are too
small to interest Wall Street and New York.”

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The bank, which has assets of $1.02-billion and ranks 101st among
the 1,400 banks of the United States, hopes to play a major role in
the future development of the island. A change in the tax law
permitting mainIland and foreign companies to keep interest
earned on profits on deposit in Puerto Rican banks without paying
tax on the interest may increase bank funds here by $100-to-$200-
million.

“When that money is invested in our economy,” Mr. Ledesma said,

“we can expect a lot more growth.”

Banker Foresees Progress

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