tion 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 Mayagüez. 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)

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.

40

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. 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.

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.

30 Letter of Juan Lopez-Mangual Puerto Rico EDA, September 19, 1969, to Paul Gonzalez, Chief, Branch of Trade Studies and Special Projects, FMC, p. 5.

40 Ibid.

41 Ibid.

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," 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 addition, 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

Puerto Rico Planning Board, Plan General de Desarrollo, 1965-75 (Elementos Socio-Economicos) (San Juan: Junta De Plantification, Puerto Rico, December, 1966) pp. 34-40.

43 Chase Manhattan Bank, op. cit., p. 20.

44 Puerto Rico Department of Labor, op. cit., pp. 5-8.

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 diversifying 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.

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.1

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

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., a 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).

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. 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.

a

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 a chemical industry includes: 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 chemicals 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. 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 consumption 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 nonalcoholic 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.

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 minimum 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 operations 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.

4. Agriculture

a. Decrease in Agricultural Output

In 1969, Puerto Rican farm production ($259 million) continued a general decline. This decline was $19 million in 1964, $6 million in 1965, $3 million in. 1966, and $7 million between 1967 and 1969.5+ This decline reflected a decrease in the value of sugar, coffee,

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. 53 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.

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

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.

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

55 The Island also grows coconuts, pineapples, and miscellaneous fruits, but their value of production is small.

50 Puerto Rico Planning Board, 1967 Economic Report to the Governor (San Juan: Junta De Planification, "n.d."), p. 31.

57 The New York Times, June 17, 1968, p. 57.

58 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.

The importance of ocean carriers to Puerto Rico's industrial program and growing economy is clear. For instance, with the large increase in Puerto Rico's tourist trade, certain containership operators1 have kept pace with the growth by adding more specialized refrigerated or insulated trailers. Ocean carriers move 99 percent of Puerto Rico's external trade and link the common market existing between the U.S. mainland and Puerto Rico. With the branch plant of a U.S. mainland company in Puerto Rico only 4 days away from New York by containership, the supply of semimanufactured and raw materials important to the operations of this plant is greatly facilitated by the highly competitive services of domestic offshore containerships. Ocean transporta

59 Puerto Rico Planning Board, 1969 Economic Report to the Governor, op. cit., pp. 15-26.

60 The projected growth in the number of total rooms is from about 8,000 in 1967 to approximately 32.000 in 1980.

61 In this study, the term containership operators or containerships compre. hends both lift-on/lift-off and roll-on/roll-off operations unless otherwise noted.

tion is important not only to the Island's industrialization program but also to the large quantities of foodstuffs which are imported from the U.S. mainland to feed the people of Puerto Rico. (The effect of ocean transportation on the movement of foodstuffs is discussed in ch. V.) In many cases the containership services and rate levels have set the pattern of doing business in Puerto Rico, particularly with respect to wholesale and retail operations which do not maintain large inventories, in part due to the lack of adequate warehousing facilities on the Island (ch. VI). The frequency and regularity of containership sailings have made it possible for these industries to operate on lowinventory levels and reduce inventory costs and even to forego some capital investment in storage facilities. The importance of carrier service to the economic development of Puerto Rico, therefore, is evident.

The importance of the Island's U.S. mainland traffic (valued at $2.8 billion in 1968) to the carriers is equally manifest. This traffic, is important to carriers because it has enabled the carriers to make necessary capital investments for development of modern and efficient containership services. Growth in this traffic over the past 18 years has been impressive. Furthermore, it is expected to rise to $5.64 billion by 1975 (Chart II-3, p. 11). The substance of this section is primarily concerned with the general flow of traffic between the mainland and Puerto Rico as well as the demand for shipping services in this trade. (Ch. VI includes a discussion of the actual magnitude of traffic moved by common carriers across the piers or berths located at San Juan, Ponce, and Mayagüez.)

2. Analysis of Total Traffic Moving Between the U.S. Mainland and Puerto Rico

a. Commonwealth's Trade With the U.S. Mainland

As a result of Puerto Rico's economic transformation from a basically one-crop economy to an industrialized society, the volume of trade between the mainland and Puerto Rico increased markedly between 1950 and 1968. Moreover, the accompanying industrial integration of the Island's economy into the mainland market has not only strengthened the economic ties existing between these areas but also greatly increased the Island's gross product and per capita incomes. Chart II-3, p. 11, demonstrates that while Puerto Rico's mainland traf

fic climbed by 435 percent, from $528 million in 1950 to $2,827 million in 1968,62 the Commonwealth's gross national product rose approximately 395 percent, from $755 million in 1950 to $3.74 billion in 1968, and per capita income increased by 305 percent, from $279 in 1950 to $1,129 per person in 1968. Thus Puerto Rico's industrial program and traffic flow have greatly facilitated the economic development of Puerto Rico.

In addition to the spectacular growth in Puerto Rico's traffic with the U.S. mainland and economy, Chart II3 also reveals another significant relationship between

TABLE 11-6

Trade Statistics FY 1950-68

(In million dollars)

the Island's imports and exports. In 1967, the Commonwealth had a large trade deficit (i.e. approximately $313 million) because it purchased more from the U.S. mainland than it sold in this market. This trade deficit resulted not from a decline in exports to the Mainland 63 but mainly from the large increase in imports, which have risen about 471 percent over the past 18 years as a result of Puerto Rico's industrialization and greater incomes.64 These increases in imports and growth in traffic have been crucial to the freight revenues earned by most carriers in this trade.

The dominant position of the U.S. mainland in Puerto Rico's external trade is evident in a survey of the Island's trade. Table II-6 following presents a comparison of domestic and foreign cargo movements for the 18-year period 1950 to 1968. Throughout this 18year period, Puerto Rico's traffic with the U.S. mainland varied from about 83 percent to 89 percent of the total, averaging approximately 85 percent. During this period, the Island's economy purchased an average of 85 percent of all of its imports from the U.S. mainland and sold 94 percent of its exports to the U.S. mainland (app. A, table 3). In 1968, the U.S. mainland traffic with Puerto Rico amounted to $2.83 billion, or 83 percent of the Island's total trade. Of this, $1.57

Purchases of mainland products increased by 394 percent, from $318 million in 1950 to $1.57 billion in 1968, while sales to the mainland rose by 798 percent, from $210 million in 1950 to $1,256 million in 1968. It appears that the more rapid increase in traffic from Puerto Rico to the mainland and the higher value of finished goods moving northbound have had the effect of bringing the dollar value of this two way traffic more nearly into balance.

billion was southbound traffic largely from North Atlantic points of origin. This was about six times as much as the total traffic imported from the mainland in 1947 when "Operation Bootstrap" was in its infancy. In contrast, Puerto Rico's 1968 imports from all European, Caribbean (except Virgin Islands), South American, and other foreign countries amounted to $385 million, or 20 percent of the total imports; imports from the Virgin Islands amounted to $14 million, or 0.7 percent of the total imports. The dominant position of the Commonwealth's trade with the U.S. mainland is also demonstrated by table II-7 which shows that Puerto Rico is the fourth largest overseas market

63 On the contrary, during this period, exports ot the U.S. mainland increased approximately 498 percent (app. A, table 3).

64 In 1967, Puerto Rico had to import short and long term capital amounting to $629.9 million in order to cover its balance of payments deficit in the current account (Source: Puerto Rico Planning Board, 1967 Economic Report to the Governor, op. cit., p. 62).