year or approximately 180,000 by 1974. If this increase in jobs is achieved, it will substantially reduce the 210,000 new jobs which would be required by 1974 to bring the rate of unemployment down to some 4 percent. 21

c. Family and Per Capita Income

Although Puerto Rico's 1969 per capita income of $1,230 ranks among the highest of the Caribbean and less-developed world, including Venezuela, Argentina, Brazil, Mexico, India, and Thailand, income levels are still low when compared to the more industrialized economies.

(1) Family Income.-Table II-3 below shows that slightly more than four out of every 10 Puerto Rican families subsist on annual incomes of less than $2,000 (compared to only 10.6 percent in the U.S. mainland) which is serious when one observes that the United States Appalachian "poverty line" is a minimum family income level of at least $3,000.

21 The expansion is expected to generate about 40,000 new jobs each year, or approximately 400,000 by 1979, according to the Commonwealth of Puerto Rico EDA letter of Sept. 19, 1969 to P. Gonzalez, Chief, Branch of Trade Studies and Special Projects, Bureau of Domestic Regulation, FMC.

TABLE II-3

Family Income-1963

The 1963 median family income in many Puerto Rican communities, however, was less than $600 which is $1.64 per day on which to feed, clothe, and house a family of five persons. (The average Puerto Rican family size is about five persons compared to 3.65 in the U.S. mainland.) The disparity in income is even more serious when one considers that often Puerto Rican incomes are reduced, approximately 12 percent, by the lower purchasing power of the dollar in Puerto Rico. This disparity is a result of various factors including excise taxes, marketing practices, costs of exporting from the U.S. mainland, and other inflationary costs. 22

(2) Per Capita Income.-As in the case of family income, per capita income of Puerto Rico, which rose from $266 in 1940 to some $1,230 in 1969, also is unevenly distributed. Table II-4 shows that per capita income is about three times higher in the San Juan metropolitan area than in the rest of the San Juan region and some two times as high as in the Ponce and Mayagüez regions.

22 The effect of ocean freight rates on cost of living in Puerto Rico is analyzed in chapter V.

3. Industry and Capital

Although the Island is a Commonwealth and located more than 1,000 miles from principal U.S. mainland ports and sources of supply, it is still an integral part of the economic system of the United States. Federal laws, with few exceptions, are applicable in Puerto Rico as well as within any state of the union; and social, economic, and legal ties which closely bind the Island to the mainland serve to give Puerto Ricans a taste and desire to achieve industrialization and a higher standard of living. Because few goods are produced locally, it means that ocean transportation is primarily required to transport many goods to the Island. Not only is almost 40 percent of locally consumed food imported from the mainland (ch. V) but 60 percent of the Island's furniture and almost 25 percent of the clothing.

The most significant factor which makes the Island's ocean transportation system unique is the industrialization program, commonly referred to as "Operation Bootstrap". The purpose of this program is to industrialize Puerto Rico by attracting industry and capital. The relation between the program and ocean transportation, in terms of traffic flow, is clear. Puerto Rico's industrial development under the program is discussed in the following pages. First, however, it is deemed advisable to describe the economic environment prevailing in Puerto Rico prior to 1940 in order to illustrate the substantial progress which has occurred over the past 28 years.

a. Economy Prior to Operation Bootstrap

In 1898, when the American troops arrived on the Island, the population was only 950,000 persons. This population multiplied under improved medical services to 1.87 million by 1940, creating a population density of 546 persons per square mile with a significant portion of the people crowded into city slums or rural land which they did not own. Economic activity could not meet the expanding demand of this increase in population so that 15 percent of the labor force (90,000 persons) was unemployed; 23 the gross product was only $225 million; low productivity kept wages depressed; and per capita income was barely $266. As a result, personal incomes were approximately 20 percent of the U.S. average; with only 32 out of every

23 U.S. Congress, House, Puerto Rico, A Survey of Historical, Economic and Political Affairs, 1959, 86th Cong., 1st Sess., 1959, p. 27.

100 persons ever reaching the sixth grade; and, life expectancy at birth was only 46 years. By 1940, therefore, Puerto Rico was in the throes of widespread unemployment and poverty with a mass of unemployed, ill-housed, poorly clothed, ill fed, and uneducated people.

One of Puerto Rico's greatest problems at that time was an almost total lack of natural resources, this inhibited industrial development. There were no known mineral deposits of commercial significance, no fuels except sugarcane waste, limited forest and forest products, and a very limited commercial fishing potential.24 And, as in the case of many underdeveloped Latin countries, Puerto Rico was basically a one-crop economy; sugar dominated. The sugar industry provided one-quarter of the employment and almost two-thirds of the export earnings 25 while sugar-related companies including refineries and distilleries accounted for approximately 20 percent of the total industrial employment in 1940. Needlework, largely performed at home, constituted another important industrial activity, comprising about 60 percent of all manufacturing employment 26 and 17 percent of exports; and tobacco products provided 6 percent of manufacturing employment.

These economic conditions which depressed spending income and the capital formation upon which economic development depend, provided only a limited economic base to support the growing population. In this economic setting, Puerto Rico's future outlook was dismal and pointed toward greater unemployment and poverty.

Although the groundwork for economic progress had already been established prior to 1940, that year can be looked upon as the virtual start of Puerto Rico's transformation from a backward agricultural society to a diversified industrial-agricultural economy. In 1940, Puerto Rico initiated a plan for industrialization because manufacturing appeared to offer the best opportunity for employment and increasing income. At first, the Commonwealth established several governmental agencies, including the Puerto Rican Industrial Co. (PRIDCO), the Puerto Rican Planning Board, and the Government Development Bank for Puerto Rico, to assist in industrializing the Island. These agencies initially invested in five plants. However, 5 years after the program's inception, Puerto Rico realized that these

24 Ibid., pp. 26-27.

25 The sugar industry, however, was of a highly seasonal nature with employment assured only 5 months of the year.

20 The Needlework industry largely employed female labor.

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.

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

27 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.

29 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.

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 "Operation 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 per

cent.

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

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.