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CHAPTER I

THE ECONOMY AND TRAFFIC FLOW OF

THE U.S. VIRGIN ISLANDS

A. GENERAL

This chapter discusses the economy of the Virgin Islands, its population, labor force, industry, and traffic flow. Chapter II treats with its transportation services, and chapter III examines ocean freight rates from the U.S. mainland ports to those in the U.S. Virgin Islands, mainly St. Thomas.

and at Christiansted and Frederiksted, St. Croix. On St. Thomas and St. John, the mountain ridges run east and west and rise to 1,500 feet. The mountains slope steeply both north and south and leave little flat land for farming or urban settlement. On St. Croix, where the land slopes gradually to the southern shore, relatively large areas are suitable for farming, residential, and industrial uses. Nature has endowed these Islands with an excellent year-around climate.

1. Geography

The U.S. Virgin Islands (hereinafter referred to as either "Virgin Islands” or simply the "Islands") consists of about 50 islands and cays of which only three are of significant size and importance: St. Croix, St. Thomas, and St. John." The other islands are uninhabited. By sea, the Islands lie 1,434 nautical miles southeast of New York; 991 nautical miles from Miami, Fla.; and 40 nautical miles east of Puerto Rico at the nearest point. They are 75 air miles from San Juan.

The three major islands have a combined land area of 132 square miles. St. Croix, with 84 square miles, is 28 miles long and up to 6 miles wide; St. Thomas, with 28 square miles, is 13 miles long and up to 4 miles wide; and St. John, with 20 square miles, is 9 miles long and up to 4 miles wide. St. John lies about 3 miles east of St. Thomas, and St. Croix is about 40 miles south of the others.

The major ocean terminals for common carriers by water are located at Charlotte Amalie, St. Thomas,

2. Population

The Virgin Islands, like the rest of the Caribbean, are experiencing a population explosion which is attributable to births as well as immigration. The U.S. Census reported an increase in the population of the Virgin Islands from 26,665 in 1950 to 49,742 in 1965, or a 15. year growth of 87 percent.In 1967, the Governor's Bureau of Statistical Services estimated the population at 60,300. This, compared with the 1960 population of 32,099, shows a 7-year growth of 88 percent. Thus, the Island's population has almost doubled in the 1960-67 years. This growth trend exceeded by far the estimated annual average growth of 8 percent of the U.S. population in the 1960-65 period (The 1965 population of St. Croix was 22,020, St. Thomas 26,375, and St. John 1,347.) However, considering the limited land mass

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Virgin Islands Development Board, Overall Economic Development Program (St. Thomas : 1966), p. 11.

The Chase Manhattan Bank, The U.S. Virgin Islands (New York: 1968).

P. 8,

1 The Governor of the Virgin Islands, 1965 Annual Report (Washington : GPO, 1965). p. 3.

• Virgin Islands Department of Health, Bureau of Statistical Services, Vital Statistics 1964-65 (Charlotte Amalie : 1965), p. 9.

4. Family Income, Wages, and Per

Capita Income

of the Virgin Islands, the territory's rapid population rise can hardly be a phenomenon of more than relatively short duration. Of greater significance demographically is the division of the inhabitants of the Virgin Islands into two major population groups, one in St. Croix and the other in St. Thomas. Their separation by 40 miles of sea cannot be easily overcome despite air travel and the wide communication provided by telephone, radio, and television. This makes for two insular communities which, aside from the influence exerted by the varying topography of the two islands, have somewhat different characteristics with regard to social life and commercial pursuits.

3. Labor Force

The tourist industry has been the major stimulant to employment in recent years and is now the Islands’ largest employer. The U.S. Federal Census of Popula. tion for 1960 reported a labor force of 11,334, representing 35.3 percent of the total 1960 population. The total number actually employed in 1960 was 10,845, or 95.6 percent of the total labor force.5 The labor force was distributed as shown in table 1-1 below. The total labor force grew over 150 percent between 1960 and 1967, from 11,334 in 1960 to 26,775 in 1967 & largely to support the continually growing tourist industry.

The average number of persons per family in 1960 was five. The 1960 Census of Population disclosed that the Virgin Islands were a low-income area with a consequently depressed standard of living for over 50 percent of the wage earners in the population. Under the income distribution pattern, 34 percent of wage earners reported incomes of less than $1,000 while another 24 percent earned from $1,000 to $2,000. In 1959, only 3 percent of the population had incomes of $5,000 to $6,000, while 2 percent reported incomes of 10,000 to $15,000. This was a substantial improvement over 1950 when 58 percent of the employees earned less than $1,000.

Table 1-2 compares the 1959 income distribution of families and unrelated individuals with the 1950 census report. The wage level in the Virgin Islands took an upward turn beginning in 1962 when the minimum wage was increased to $1 an hour.

Political and military considerations prompted the acquisition of the Virgin Islands from Denmark during World War I, and for many years after the purchase, little thought was given to any systematic development or diversification of the Islands beyond the sugar monoculture stage. However, during the past decade and a half, the Virgin Islands have experienced truly phenomenal growth. Per capital income increased 122 percent in the 7-year period 1960-67 (from $957

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TABLE 1-1

Distribution of Labor Force 1960

EMPLOYMENT

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1,296 1,209

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Service workers in hotels, restaurants, etc. Craftsmen (skilled workers in various

trades) Laborers (unskilled and semiskilled work.

ers) Operatives (taxi and truck drivers, laundry

workers, etc.) Clerical workers Managers, proprietors, public officials,

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12.0 11.1

etc.
Professional workers (teachers, medical,

technical, etc)
Private household workers
Sales workers
Farm laborers
Farmers and farm managers
Occupation not reported

1,118

10.4

897
791
655
354
142
38

8.2 7.3 6.0 3.2 1.3 0.3

Source: Government of Virgin Islands, 1966. 6 U.S. Virgin Islands Development Board, op. cit., p. 11.

& Government of the Virgin Islands, Department of Commerce. Division of Trade and Industry, Annual Report July 1, 1967-June 30, 1968 (St. Thomas: 1968), p. 3.

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to $2,123).' per capita national income, for instance, had risen to about 63.2 percent of the U.S. figure for 1964 and has been growing at an estimated 15.6 percent per annum during the past 5 years. The 120-per

5 cent increase in Virgin Islands income tax collections, fiscal years 1964–67, reflected the very substantial increase in Virgin Islands' income, as more persons were employed at higher average salaries. The current minimum wage rate for industries engaged in Interstate Commerce is $1.60 an hour while the minimum wage for local retail services is $1.20 per hour. Each local industry has a different minimum. In the construction field, for example, the minimum for an unskilled worker is $1.25 an hour.

from sugarcane is the Virgin Islands' oldest significant industry and still possesses some potential for expansion. As a result of special preferences including those provided by the U.S. Tariff Act and by the territorial government, the contribution of industry to territorial income has grown to over 10 percent.10 Moreover, shipments of industrial products (almost entirely to the U.S. mainland) are responsible for the more than elevenfold increase in exports between 1960 and 1967 to a total of $74 million.11 The upward movement in manu. facturing was greatly stimulated by efforts of the local government through tax exemptions to foster the growth of business activity, especially manufacturing enterprises. There is a full exemption from various local tares and effectively a reduction of the income tax by 75 percent for those industries meeting certain requirements. In addition, a special provision of the U.S. Tariff Act benefits those manufacturers who export to the U.S. mainland. Under the act, goods may be shipped duty-free from Virgin Islands ports to other ports on the U.S. mainland if these goods qualify as Virgin Islands products and do not contain foreign material amounting to more than 50 percent of their total value.

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It is significant to mention here that in the 7-year period 1960–67, the Virgin Islands gross domestic product increased 290 percent, from $39 million in 1960 to $152 million in 1967.9 This demonstrates the tremendous growth taking place in these islands stimulated principally by tourist services and, to a lesser extent, by industry. The average annual growth rate for the Virgin Islands far exceeds the 8-percent annual increase in the GNP. Trends show that the territorial growth rate is expected to continue its rapid upward climb for at least the next 5 years before a tapering-off

occurs.

1. Natural Resources and Basic Industry

The U.S. Virgin Islands have not been blessed with the natural resources so vital to broad industrial devel. opment. Because of its size, geography, topography, and lack of a sizeable internal market, the Virgin Islands cannot sustain large-scale industrial development. For centuries the principal industrial activity of the Islands was the manufacture of rum from raw sugar. During the sixties, however, with the phasing out of sugarcane, the Islands' economy was transformed from an agrarian base to a tourist and industrial base. St. Thomas, which previously depended upon its harbor activities and commerce at Charlotte Amalie, was the first to embrace tourism as a major industry. The manufacture of rum

2. Principal Industries

Tourism is by far the largest industry in the Virgin Islands. The strong growth in this industry of the Vir. gin Islands during the 1960's is illustrated by the rise in the number of tourists from 200,000 in fiscal year 1960–61 to 963,000 in 1967–68 representing an average annual increase of 109,000. During the same period spending by these visitors approximated $100 million. a. Construction and Manufacturing

In number of employees, construction is the second most important industry in the Virgin Islands. In 1960 about 1,200 persons were employed in construction. The current number is about 4,000, including construction workers on the public payroll. The industry's annual payroll is estimated at about $10 million.12 The value of new construction permits has been rising steadily in recent years. According to construction permits issued in the 1961-65 period, the value of new private residential and commercial construction more than doubled.

In 1965, the manufacturing industry employed about 1,400 people with an estimated annual payroll of abo

* The Chase Manhattan Bank, op. cit., p. 2.

• Darwin Creque, The U.S. Virgins And The Eastern Caribbean: (Philadelphia: Whitmore Publishing Co., Collowhill Street, Philadelphia 1968), various pages.

. Prior to 1960, the U.S. Virgin Islands, owing to the lack of a governmental statistical bureau, had not undertaken any computations of gross domestic product.

10 The Chase Manhattan Bank, op. cit., p. 5.

11 Government of the Virgin Islands, Department of Commerce, Division of Trade and Industry, op. cil., p. 8.

12 Virgin Islands Development Board, op. cit., p. 13.

$5 million.13 Compared with 1963, this represented an advance of about 40 percent in employment and of about 60 percent in annual payroll. In fiscal year 1968, , manufacturing industries employed approximately 2,300 persons with an estimated annual payroll of $7 million.

b. Finance

In keeping with the economic expansion of the Virgin Islands, banking and insurance have assisted growth industries. Retail trade has been a major beneficiary of the tourist boom. Aided by the low 6-percent import duty imposed across-the-board, scores of large and small shops, selling luxury goods at prices below those on the U.S. mainland, have sprung up in Charlotte Amalie, Christiansted, and Frederiksted. In a sense "Christmas shopping” takes place twice a year in the Virgin Islands, particularly on St. Thomas, with peak selling periods in both winter and summer tourist seasons. As a result, retail sales have soared by nearly 40 percent a year during the 1960's. This rapid business expansion has been reflected in an average annual growth in commercial bank deposits of about 30 percent during the past few years. These deposits totaled some $135 million last year, compared with only about $25 million at the start of the 1960's.

watches and watch movements containing foreign components which may be imported duty-free into the United States from insular possessions. This legislation was necessary in order to retain the watch assembly industry in the Virgin Islands, which was rapidly getting out of hand. (U.S. shipments rose from 5,000 units in 1959 to a volume in excess of 4,500,000 units.) Public Law 89-805 imposed an overall quota for duty-free entry of watches and watch movements assembled in the three insular possessions for each calendar year. The quota is set at one-ninth of total apparent watch consumption in the U.S. mainland during the preceding calendar year. Moreover, the statute expressly allocates 87.5 percent of the total quota to producers in the Virgin Islands, 8.33 percent to producers in Guam, and 4.17 percent to producers in American Samoa. While most of the watch concerns are shipping to the U.S. mainland on a regular basis, a few of them have encountered sluggish markets since the tariff reduction on foreign watches. The total watch quota for the Virgin Islands during 1967 was 3,773,886.

(2) Oil and Alumina Processing.—The Hess Oil Refinery started operations late in 1966, processing crude oil purchased from Venezuelan producers. In December 1967, Hess Oil was alloted a specific 10-year quota of 15,000 barrels of petroleum products per day for shipments to the U.S. mainland. In return for this allocation, the refinery pays a royalty of 50¢ per barrel, equivalent to $7,500 per day, to the Virgin Islands Government.15 The remainder of the output is sold in Europe. In addition to tax preferences, the refinery enjoys the advantages of a strategic location in relation to sources of crude oil and markets in the eastern United States and in Europe, and the ability to handle tankers of up to 60,000 tons.

A similar pattern of self-sufficiency has been experienced by the Harvey Alumina plant, which began operations at the end of 1966. Bauxite from Australia and West Africa is processed into alumina, which is then shipped to refining plants in Oregon and Norway. The Virgin Islands are considered to be a strategic location for these operations, close to potential future sources of bauxite in the Caribbean and Latin America and between the Harvey Company's two markets.

c. Other Industries

(1) Watches.The major beneficiary under section 301 of the U.S. Tariff Act has been the watch industry. Watch assembly operations utilizing parts imported from various foreign countries, started in 1959. The apparent profitability of the first assembly operations attracted other watch companies, and production jumped to over 4.5 million units by the mid-1960's. Sixteen watch companies are now located in the Virgin Islands including local affiliates of many well-known U.S. firms. Typically these companies buy parts from Japan or Germany; assemble complete jewelled watch movements, using Swiss machines; and send movements or cased watches to the Mainland to be sold in the moderate priced market. The trade in watches and watch movements is subject to certain limitations, however, as has been carefully and clearly pointed out by the Virgin Islands' Division of Trade and Industry."

On November 10, 1966, Congress passed Public Law 89–805 which established a limitation on the number of

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d. Future Trends 16

Industries operating under special advantages will probably continue to furnish the bulk of Virgin Islands exports both to the U.S. mainland and abroad. Over the past few years, shipments of watches to the Mainland alone have accounted for more than half of total exports. With the recent start of full-scale operations, petroleum products and alumina will be increasingly exported to Europe and provide a boost to Virgin Is. lands receipts from nondollar areas, with which the territory runs a large trade deficit. However, a further major expansion of industry in the Virgin Islands appears unlikely at this time due in large part to the shortage of skilled labor. Nevertheless, the Virgin Islands still hold considerable potential for growth of certain types of industries. Based on raw material availabilities, the territory might profitably support wood fabricating facilities, as well as meat packaging plants. Like Puerto Rico, such industrial growth will probably lean more to capital-intensive rather than to labor-intensive operations. In addition, plants utilizing female workers, still in relatively abundant supply, might be able to meet their personnel needs locally. On St. Thomas, the “Sub Base” industrial area west of Charlotte Amalie is being developed to accommodate additional industries and provide needed warehouse facilities. This project should help significantly in diversifying the St. Thomas economy. But the bulk of future industrial growth will probably be located in the central portion of St. Croix, which by topography and prevailing land use, is suited for this purpose. For the foreseeable future, the Virgin Islands will continue to depend upon a heavy inflow of tourists as the foundation of its economy.

13 lbid.

14 Government of the Virgin Islands, Department of Commerce, Division of Trade and Industry, op. cit., pp. 2–3.

15 The Chase Manhattan Bank, op. cit., p. 9. 16 The Chase Manhattan Bank, op. cit., p. 6.

Harvey Alumina Inc. located at St. Croix). Food imports climbed from $13.4 million to $17.4 million followed by significant increases in drugs and chemicals, liquors and beverages, and construction materials. Overall imports from the U.S. mainland rose from $94.6 million in 1966 to $103 million in 1967, about 9 percent.

The U.S. Virgin Islands' leading 1967 exports, in descending order of revenue importance, were watches, watch movements, woolen fabrics, rum and gin, jewelry parts, perfumery and toilet water, and whiskey and cordials.18 During the period from 1962 to 1967, exports from the Virgin Islands to the U.S. mainland and Puerto Rico experienced an average increase of approximately 290 percent in terms of the value of the commodities exported from about $19.12 million in 1962 to $74.49 million in 1967. Closer scrutiny of the export situation indicated, however, that this was not a consistent increase embracing all commodities but rather a mixed pattern of growths and declines with certain commodities climbing as high as 744 percent and others declining as much as 92 percent over the 5-year period. Thus, one can see that the expansion of the export industry on the Islands was uneven over these 5 years. The leading commodity exported, in terms of revenue, was watches and movements, the largest single export industry of the Virgin Islands. This category consisting of 28.33 percent of total 1967 exports experienced a very healthy growth of approximately 744 percent from 1962. The next export in order of revenue importance was woolen fabrics consisting of approximately 5 percent of total exports. This export category's revenue declined 56 percent and, in fact, experienced the second largest decrease relative to total exports over this period. It is noteworthy that, while this item comprised almost half of the 1962 exports, it amounted to only a little over 5 percent of 1967 exports. The third most important export commodity, in terms of revenue, was rum and gin which comprised 2.6 percent of total 1967 exports. The value of this export increased 87.3 percent. The fourth most important revenue export, perfumery and toilet water, experienced the largest percentage decrease. This item, consisting of 0.06 percent of the 1967 exports, decreased 92 percent over the 5 years. Whiskey and cordials earned only 0.03 percent of total exports in 1967. This commodity experienced an increase of 17.3 percent from 1962 to 1967.

C. COMMERCE

The traffic flow of the Virgin Islands attained a new high during the 1960-67 period reflecting the significant rise in employment, earnings, manufacturing, and standard of living experienced during this period. Hess Oil, Virgin Islands Inc. (Hess Oil) is the largest producer on the Islands, followed by the rum industry and assembly of watch movement and parts.

During the 1960–67 period, imports increased more than four times from $42.2 million in 1960 to $172 million in 1967.17 On a per capita basis, imports rose about 110 percent during the same period from $1,360 to $2,900. In 1967, imports of machinery, which climbed $7 million in value, represented the largest dollar increase. Much of this machinery was destined for applications in heavy industry (i.e., Hess Oil and

17 Government of the Virgin Islands, Department of Commerce, Division of Trade and Industry, op. cit., p. 7.

18 Government of the Virgin Island, Department of Commerce, Division of Trade and Industry, op. cit. p. 19.

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