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plants contributed only marginal to reducing unemployment and, for the most part, operated at a loss. Moreover, these plants had produced only 2,000 additional jobs where 90,000 were needed in 1940 and unemployment remained as high as the pre-1940 levels. (The labor force had expanded from 602,000 in 1940 to 673,000 in 1947.) For these reasons, the Commonwealth decided to dispose of governmental operations in manufacturing and instead focus its program for industrialization on the promotion of private investment capital from the U.S. mainland. Already existing in favor of such a program was the factor of exemption from Federal income taxes.
eral other factors which facilitated the rapid growth that followed. Perhaps the most important factor was the common market existing between the Commonwealth and the Mainland. This common market provided a free mobility of labor, capital, and trade (traffic). This mobility was strengthened by the rapidly developing transportation system of Puerto Rico, including new large trailerships and jet transports which insured fast and frequent service as well as relatively low freight charges between sources of supply and demand. The upshot of this program was that private investment received the assistance it needed to put Puerto Rico's industrialization on a selfsustaining basis.
One of the most important early decisions in "Opera. tion Bootstrap" was the 1950'creation of the EDA which assumed the industrial promotion and functions of PRIDCO. Today, EDA operates through industrialpromotional offices located in Puerto Rico and the U.S. mainland. The main U.S. office is in New York City, and branches are located in Philadelphia, Boston, Miami, St. Louis, Chicago, and Los Angeles. These offices provide businessmen with detailed information on transportation, labor, materials, and taxes; help industry select plantsites, and/or lease or construct factory buildings; and, arrange loans. EDA also invests its own funds in improving roads, and terminals, expanding electrical power, and increasing educational facilities. By 1969, some 1,785 EDA-sponsored plants had established operations in Puerto Rico and manufacturing had become the key sector of the economy.30 As a result, more Puerto Ricans worked in manufacturing than in agricultural employment and the Commonwealth's 1968 gross product climbed to more than $3.7 billion, an increase of 8.8 percent over the preceding year, while personal income and expenditures showed comparable growth 31 (app. A). Moreover, per capita income reached the highest level in all of Latin America and unemployment declined to approximately 12 percent.
Table II-5 below shows the Commonwealth's 1968 major industries (2,588 plants) and employment in manufacturing, which totaled some 137,000 persons. The EDA-sponsored plants, which amounted to some 65 percent of all Puerto Rican plants in 1968; accounted for some 66 percent of all manufacturing equip
b. Transformation of Puerto Rico's Economy
Perhaps the most important phase of Puerto Rico's industrialization was accomplished within the free enterprise system, with the Commonwealth largely confining its role to stimulating private investment capital by the use of tax incentives. In 1948, the government inaugurated the present program of industrialization, the so-called “Operation Bootstrap”. From this time onward, government measures, for which the Commonwealth's EDA was responsible, beginning in 1950, stimulated the flow of private capital from United States, foreign, and local sources. The main incentive offered by the Commonwealth to new plants attracted from the United States, was a 10-year complete exemption from local corporate income taxes, property taxes, and municipal levies.27 Subsequently, tax grants have been devised so as to differentiate between high, medium, and scarcely industrialized regions granting 10., 12., and 17year exemptions, respectively to projects locating in these areas. Manufacturers also benefitted from other tax advantages. Puerto Rico offered a maximum corporate tax of 36.75 percent compared to 52.8 percent 28 on the U.S. mainland and a deferrable depreciation schedule.29 The abundant supply of industrious and relatively inexpensive labor was another important incentive for relocating plants from the U.S. mainland to Puerto Rico. Although tax exemption was the key factor in Puerto Rico's rapid industralization, there were sev
37 Commonwealth of Puerto Rico The Industrial Incentive Act of 1963 (Act No. 57 of June 13, 1963).
28 This figure includes a 48 percent base rate plus a 10 percent surtax which will expire in 1970.
20 Under Puerto Rico's tax laws a taxpayer may claim depreciation of the full cost of capital assets at any time without reference or regard to the useful life of the property, provided that such a claim does not exceed the value of net profits as calculated otherwise in any one tax year. This important tax deduction can thus be shifted forward to be applied against revenues for tax purposes when the tax exemptions of the industry expires.
30 Letter of Juan Lopez-Mangual of Puerto Rico EDA, to Paul Gonzalez, Chief, Branch of Trade Studies and Special Projects, FMC, September 19, 1969, p. 4.
31 "Petrochemicals in Puerto Rico", Fortune June 1, 1968, p. 53. The Island's gross product of $3.7 billion in 1968, represented a growth of 10.6 percent over the preceding year.
Source: Puerto Rico Department of Labor, Census of Manufacturing Industries of Puerto Rico, October 1968 (San Juan: Bureau of Labor Statistics, April 1969), pp. 12–16.
ment 32 and dominated many manufacturing sectors, particularly in apparel, textile, and metal products output.
Of the 1,785 EDA-sponsored plants operating in Puerto Rico in 1969 as a result of “Operation Bootstrap”, more than one-third (36 percent) are owned and operated by Island residents. The other two-thirds are largely subsidiaries of U.S. mainland companies with production oriented toward markets on the U.S. mainland. This stresses the importance of reasonable ocean rates and transportation efficiencies to the continuation of the Island's economic growth.
The principal locations of the parent U.S. mainland companies are New York, and New Jersey (which account for 50 percent of the plants that have located on the Island), California, Massachusetts, Illinois, and Pennsylvania. Approximately 63 percent of the largest manufacturing companies now on the Island 34 estab. lished operations in Puerto Rico between 1960–64, indicating a growing confidence in Puerto Rico's industrial development.
EDA-sponsored plants are located throughout the
Island in almost every one of the 76 municipalities of the Commonwealth, but plant dispersion is highly unbalanced with manufacturing concentrated in urban centers, particularly in the San Juan metropolitan area. Chart II-1, p. 21, illustrates the three major economic and geographical regions of the island.35 (This regional breakdown is used by the planning board for purposes of economic and social planning.) As indicated previously, in 1968 total manufacturing establishments in Puerto Rico amounted to some 2,600 plants. However, 37 percent (967 plants) were located in the San Juan metropolitan area. These were dispersed as follows: San Juan, 560; Bayamón, 157; Carolina, 186; Cataño, 38; and, Trujillo Alto, 26.36 On the other hand, only 15 percent (393 plants) were located in the entire region of Mayagüez; and 12 percent (321 plants) in the region of Ponce.37 Moreover, many of the municipalities in the Mayagüez and Ponce regions generally contained only three or four plants. Thus, industry is concentrated despite the Commonwealth's continual efforts to disperse industry to the underdeveloped industrial zones through selective use of the tax exemption. As a result of this concentration, the Commonwealth's utilization of land and labor is unevenly balanced and family income is particularly low in the areas outside the San Juan metropolitan area. It is important, therefore, that economic planning continue to stress industrial dispersion throughout the Island, particularly to the smaller municipalities within the regions of Ponce and May. agüez. This dispersion will also alleviate some of the traffic and transportation congestion now existing within the San Juan metropolitan area. c. Light Industry (Labor-Intensive)
32 In 1968, manufacturing made a substantial contribution to the economy, The incomes generated by manufacturing totaled some $753 million which accounted for some 25 percent of Puerto Rico's total income of $3.7 billion and employment in manufacturing more than doubled, from the 56,000 workers in 1940 to some 137,000 in 1968. The number of persons employed in cutting sugarcane dwindled since 1950, from 143,000 to 7,000 according to The New York Times, March 29, 1970, p. 74.
33 Letter of Juan Lopez-Mangual Puerto Rico EDA, to Paul Gonzalez, Chief, Branch of Trade Studies and Special Projects, FMC, January 20, 1969, p. 3.
34 Sixty of the 500 largest manufacturing firms were operating 117 plants on the Island in 1961.
35 Puerto Rico's 76 municipalities and three major economic and geo. graphic regions are described in footnote 3, p. 15.
38 Puerto Rico Department of Labor, op. cit., pp. 23–25.
37 The lopsided urban economic growth has concerned Puerto Rico govern. ment officials who want to stimulate the economy in the hinter.lands. According to the Puerto Rico Highway Authorities, industries do not want to build into the interior because these areas are so isolated, indicating there is a need for better highways. Puerto Rico's road system is discussed in Chapter III. (Source: New York Times, March 29, 1970, p. 74.)
The predominant number of factories which were initially attracted to Puerto Rico under “Operation Boostrap” were light industry subsidiaries of U.S. mainland companies.38 These companies were laborintensive industries (i.e. where labor costs form a sig. nificant part of the total production costs), such as the apparel and textile industries, footwear industry, and the light electrical and electronics industry. These light industries, which largely employ female labor, not only depend principally on the U.S. mainland for raw materials and semimanufactured goods, but also export the bulk of their production to markets on the mainland.
The apparel industry, which mainly produces corsets, women's and children's underwear, dress shirts, and nightwear in some 461 plants, remains one of the most important in Puerto Rico, employing some 40, 165 workers.39 (Table II-5, p. 14.) In 1968, the textile industry, which produces carpets, rugs, knitted fabrics, and elastic thread, employed some 8,198 workers in 78 plants. The apparel and textile industries, therefore, comprise a significant part of Puerto Rico's total employment. The electrical and electronics industry, which mainly assembles component parts such as capacitors, electric relays, microphones and electron tubes, employed about 9,148 workers in 103 plants. The footwear industry, which produces dress shoes, sandals, moccasins, and baby shoes, employed some 11,388 workers.41 Finally, a cigar manufacturing and a fabricated plastic industry also utilized the benefits of low labor costs and contributed to reducing unemployment in Puerto Rico.
measures have attempted to shift production from light to heavy industries where heavy equipment costs form a larger part of the total production costs.42 Heavy industry is being emphasized for the purpose of counteracting the adverse effects of rising labor wages and shortage of skilled labor in Puerto Rico.
The metal products and machinery industry is the most important heavy industry in Puerto Rico. This industry, which produces metal cans, cutlery, metal doors, sheet metal works and food products machinery, employed some 4,956 workers in 266 plants and generated $134.3 million of income in 1968. This industry grew at the rapid pace of some 60 percent annually from the mid-1950's to 1962.43 Operations of this industry include heavy foundry, machine shops and stamping. The local Puerto Rican steel mill operates its furnaces solely on locally collected scrap and uses its rolling mill for making reinforced bars while the foundries operate on imported pig iron and scrap. The shop and steel fabricating operations, which produces repair and replacement parts of machinery and ships, is a more important operation. The current trend points to heavier machinery and larger plant size as well as expansion in the future.
Future extraction of copper deposits recently discovered in Puerto Rico could enhance development of this industry. As previously indicated, copper deposits have been under recent exploration within the proximity of the Adjuntas Utuado-Lares area, which is about 20 miles south of Arecibo. It is estimated that the potential production of some 100 million tons annually may be possible for a period of more than 30 years, with mining and smelting located in Puerto Rico.
The chemical industry, which primarily manufactures fertilizers, industrial and agricultural chemicals, paints, soaps, drugs, and medicines, 44 is a dynamic sector of Puerto Rico's heavy industry. It ranks among Puerto Rico's fastest growing industries. In 1968, there were about 107 plants employing some 4,492 workers, compared with 49 plants in 1950. These plants generated personal incomes of some $58.7 million which was almost six times the 1960 value. The industries' export earnings also expanded by the same amount. In addi. tion, within the past few years, the industry shifted from small-scale operations to large-scale production and established major capital-intensive plants to increase production efficiency. Perhaps more important
d. Heavy Industry (Capital-Intensive)
Although light industry still dominates the Puerto Rican industrial scheme, in recent years government
38 Chase Manhattan Bank, Industry in Puerto Rico (New York: Economie Research Division, July 1967), p. 19.
39 Letter of Juan Lopez-Mangual Puerto Rico EDA, September 19, 1969, to Paul Gonzalez, Chief, Branch of Trade Studies and Special Projects, FMC,
49 Puerto Rico Planning Board, Plan General de Desarrollo, 1965-75 (Ele. mentos Socio-Economicos) (San Juan: Junta De Plantification, Puerto Rico, December, 1966) pp. 34-40.
43 Chase Manhattan Bank, op. cit., p. 20.
40 Ibid. 4 Ibid.
yet is the investment in the petrochemical industry which is expected to reach a total of some $1 billion in 1975, according to the EDA.45
Many of these rising chemical and metallurgical companies in heavy industry have been able to offer higher wages and still keep labor costs down with profits higher than on the U.S. mainland, particularly in the pharmaceutical sector. These plants are less affected by rising wages and less likely to terminate operations at the end of the 10-year tax exemption period. They also offer the opportunity of further di. versifying Puerto Rico's industrial-agricultural economy; they provide the Commonwealth with the scientific and technical knowledge required to meet the expansion needs of industrialization; and, they also provide the efficiency and savings to meet competition in U.S. and foreign markets.
Sun Oil Co. at Yabucoa ($125 million within the next 7 years).48 The Sun Oil Co. operation at Yabucoa on the east coast of Puerto Rico will include a $12 million all-weather, multipurpose harbor with a 55-foot channel and docks for 100,000-ton ships. 49 In addition, Sun will supply feed stocks for low-cost electric power generation which may attract aluminum smelters, petrochemicals, and raw materials.50 Petrochemicals, therefore, offer the economy a great opportunity for industrial growth and integration and, as more derivatives are produced, additional opportunities will arise for manufacturing consumer items. While the petrochemical industry is in its infancy, the ultimate development of this industry, including production of synthetic fibers, plastics, soaps, and various end products will undoubtedly require a substantial increase in ocean transportation services and will produce even greater freight revenues for the common carriers in this trade.
e. Petrochemical Industry
The petrochemical industry is already big business in Puerto Rico with investment exceeding $420 million, with an additional $1.2 billion in refineries. 46 core petrochemicals, intermediate chemical and related plants planned or being constructed. The vast petrochemical industry has been established in the southern sector of the Island. In 1953, the Island's first two refineries were organized. Caribbean Gulf Refinery Corp. was first to commence operations in 1955, and the Commonwealth Oil Refinery (CORCO) commenced operations at Guayanilla Bay in January 1956. In the last 4 years, the petrochemical industry has grown considerably and attracted 10 blue-chip companies.47
High additional investments are planned by Union Carbide ($250 million); Phillips Petro Co. ($175 million); Pittsburgh Plate Glass Co. (more than $100 million within 2 to 3 years); W. R. Grace Co. ($30 million); CORCO (to bring its total investment to $300 million by 1970; Hooker Chemical Corp. and
f. Growth in EDA-Sponsored Industry and
Wages The Commonwealth's industrialization program has been one of the prime movers generating growth throughout the economy and should continue on a selfsustaining basis because the bulk of the EDA-sponsored factories, totalling some 1,785 in 1969, have remained in Puerto Rico after the expiration of their 10-year tax exemption. This number continues to grow, stimulating exports and growth in the domestic market.51 (Projected growths of EDA-sponsored factories,
48 Ibid., p. 48. 49 Ibid., p. 50.
50 For instance, these plants are utilizing Puerto Rican clay, limestone, sand, salt, and petroleum byproducts (refinery gasses). The industries' aromatic plant, one of the world's largest, provided materials for a number of other chemical plants making paint, plastic items, synthetics, detergents, insecticides, and cosmetics. In addition chemical industry includes: a chemical core plant which feeds chemicals to other plants for production of synthetic fibers and plastics; a plant to produce raw materials used by other companies for making plastics and insecticides; a plant to produce raw materials for other plants making fiber and film; a plant to produce chemi. cals used by other plants in nylon production; an integrated Nylon 66 plant; a plant to produce chemicals used by other companies in making plastic sheets and films; and, a plant to produce chemicals in making plasticizers.
45 Additional plants to produce aromatic solvents, higher alcohols, soaps, synthetic fibers, plastics, and various end products that can be used for raw materials for other industries yet to be established are under construction or have recently been completed.
46 Fortune, op. cit., p. 48.
47 These companies include: CORCO, which operates a $41 million aromatic plant; HERCOR Chemical Corp., which produces paraxylene; SACCI, a Royal Dutch Shell Corp., which joined CORCO in producing cyclohexane, (In all, CORCO has about $180 million invested in five plants); Phillips Puerto Rico Corp., a naphtha cracker, producing benzene and other chemicals; Fiber National Corp., which is designed to produce about 120 million pounds of Nylon 66 annually; Union Carbide, which is currently producing about 120 million pounds of ethylene glycol, 160 million pounds of oxo alcohol and 25 million pounds of butadiene; Puerto Rico Chemical Co., 3 Hooker subsidiary, which makes phthalic anhydride from local orthoxylene; Peerless Chemical Corp., which is located near CORCO; and Union Carbide at Peñuelas producing Aliphit solvents. (Fortune op. cit., p. 48).
51 Today an increasing amount of the output is being locally consumed. Sales of the Puerto Rican manufacturers to the local areas rose 13.5 percent annually between 1954-63 with many of the companies attracted from the mainland benefitting from enlarged local sales. In 1968, total personal con. sumption expenditures reached $2.9 billion (app. A, table 1). And, in recent years, the economy experienced an increasing demand for consumer goods, especially automobiles and household appliances. In early 1970, some 600,000 motor vehicles were registered on the Island, exceeding most Latin American countries, and more refrigerators, washing machines, and stoves are being imported. The food processing industry buys a substantial amount of non. alcoholic beverages, canned fruits and vegetables, meat products, and ice cream from the local market (ch. V). Moreover, the construction industry, which reached a total output of $690.3 million in 1968 (app. A, table 1) has absorbed an increasing amount of manufacturing output, particularly cement, metal, and wood products. In 1963, construction purchases from manufactur. ing amounted to $100 million.
and tobacco, the Island's principal crops comprising approximately 28 percent of total farm production in 1969.55 On the other hand, the value of livestock products, mainly milk, eggs, beef, pork, and poultry, continued to grow and now comprise about 42 percent of the Island's agricultural output.
b. Investment in Agriculture
manufacturing income and wages are discussed in ch. II Section C.2c.) The number of new plants opening operations far exceeds those closing businesses. In 1969, only 65 companies out of 276 companies terminated operations at the end of their 10-year period and returned to the United States. This was largely due to managerial and wage difficulties adversely affecting their income. In recent years light industry companies have been increasingly affected by rising wages in Puerto Rico. The Commonwealth's average wage, visà-vis labor-intensive factories located in North Carolina and Mississippi has narrowed considerably during the past decade.52 This differential has been reduced in labor intensive industries (e.g. apparel and textile plants) where the Puerto Rican wage advantage is now only 31 to 36 cents per hour, compared with 37 to 40 cents per hour in 1960.53 However, the previous min. imum wage rate of 75 cents per hour was increased to 97 cents per hour early in 1968. This is significant because the southern part of the United States has been the historical location of company operations which largely depend on low labor costs in their cost of production.
If the wage differential between Puerto Rican light industries and those located in the southern United States continues to narrow, an increasing number of these companies, particularly those in the apparel and textile industries may consider reestablishment of opera- . tions or favor private investment in the Southland at a loss of employment and income in Puerto Rico. Improved efficiency of carrier operations and reasonable freight rates on southbound semimanufactured goods and northbound finished products will become more and more important to the carriers as the Puerto Rican wage advantage diminishes.
In 1967 while direct domestic investment in various sectors of the economy climbed, investment in agricultural machinery registered a decline.56 As previously indicated, farm production has been adversely affected by the Island's exceedingly small amount of fixed domestic investment in agriculture.57
Although much of the Island's demand for eggs, milk, and meats is still supplied through imports from the mainland (largely transported in trailerload quantities on regular frequencies as discussed in ch. V) continued growth in local production of these livestock products over the past few years indicates that in the long run domestic production of livestock items may satisfy a substantial part of the Island's demand. It appears, however, that success in substituting imported foods with local production will depend on the Island's investment in agriculture and increased production of these commodities. Recently, the Island initiated several agricultural programs and farm subsidies to assist agricultural output because it appeared more efficient to increase productivity by greater direct investment in mechanization, capital equipment and other more efficient farming techniques, according to the Puerto Rican Planning Board.
a. Decrease in Agricultural Output
c. Agricultural Exports
Puerto Rico's exports of agricultural products to U.S. mainland markets also depend on greater fixed domestic investment in agriculture. As a result of the tariff reductions arising from the Kennedy round, 58 each year from January 1, 1968 through 1972, Puerto Rico will face increased competition from agricultural products imported from foreign countries. These large reductions in U.S. import duties probably will place the Commonwealth's farm exports in an unfavorable competitive position. These tariff reductions emphasize the
62 Average hourly earnings in all manufacturing plants in Puerto Rico increased 45 percent between 1960 and mid-1966, from 89 cents in 1960 to $1.29 in 1966. Rising wages have affected the apparel, textile, electronic, and electrical industries, especially on assembly line work, which constitutes the major production costs of most companies in these industries.
63 Chase Manhattan Bank, op. cit., p. 20.
54 Puerto Rico Planning Board, 1968 Economic Report to the Governor (San Juan : Junta De Plantification, “n.d."), p. A-4.
65 The Island also grows coconuts, pineapples, and miscellaneous fruits, but their value of production is small.
66 Puerto Rico Planning Board, 1967 Economic Report to the Governor (San Juan: Junta De Planification, “n.d."), p. 31.
37 The New York Times, June 17, 1968, p. 57.
68 The Trade Expansion Act of 1962 granted the President power to reduce duties existing on July 1, 1962, up to 50 percent on various commodities including farm products.