Puerto Rico: Suffering the "Dutch Disease" in Reverse.
In the late 1950s, and on into the 1960s, large deposits of natural gas were discovered in the North Sea off the coast of the Netherlands. As these gas fields were exploited, and played an increasingly large role in Netherland exports, the price of the Dutch guilder rose in terms of other countries' currencies. That is, the demand for Dutch gas exports generated a rising demand for Dutch guilders, which drove up the value of the guilder.
The higher value of the guilder, however, meant that goods and services produced in the Netherlands were more costly on world markets--i.e. buyers in other countries had to use more of their own currencies to buy guilders to purchase those goods and services. Thus, Dutch industries other than natural gas were harmed, becoming less competitive on world markets. In spite of the advent of the Dutch natural gas wealth, overall the Dutch economy was weakened--the "Dutch Disease." A 2014 article in The Economist, after noting that the magazine had coined the term Dutch Disease in 1977, pointed out that, "From 1970 to 1977 unemployment [in the Netherlands] increased from 1.1% to 5.1%. Corporate investment was tumbling" (The Economist 2014).
The Dutch Disease concept has been widely used in discussions of the paradoxical situation in the economies of several countries where seemingly good news, such as the discovery of large oil reserves, turns out to weaken other parts of the economy and leads to bad news, an overall negative economic impact. Because natural resource extraction is often not labour intensive, the weakness elsewhere in the economy can yield high unemployment rates. Also, when the natural resource gives out, or competing sources of the resource drive down its price, there is the risk that no other industries can take its place. The Dutch Disease, then, is sometimes referred to as a "natural resource curse" (Sachs and Warner 2001; Frankel 2010). (There are, of course, exceptions, as in the Netherlands, where the economy has done relatively well in subsequent years.)
MORE THAN CURRENCY VALUES
The Dutch Disease is usually understood as developing through the change in currency values, as described above. And currency value changes can certainly be an important part of the story (Corden and Neary 1982; Corden 1984). They are not, however, the whole story.
The development of natural resources--or other economic activities with similar impacts--generally depends on government support. Tax policy can be especially important, including, for example, the way depreciation of a resource is treated for tax purposes. Also, infrastructure investment, often supported if not fully financed by government, is usually essential for natural resource exploitation. And then there is the relation of that exploitation to the environment and the government response--with government support for the natural resource activity coming as an act of omission (omission of regulation) rather than commission.
There is also the government role in supporting the availability of capital and skill-appropriate labour, necessary for the exploitation of natural resources. Government policy, for example, can give favourable treatment to capital, either domestic or foreign, affecting the size and impact of the activity. The nature of this favourable treatment can draw funds that would otherwise be used in the development of other activities, exacerbating the weakness of those other activities. Indeed, for whatever reason, as the natural resource industry expands--special government support or no special government support--it can draw capital away from other sectors of the economy.
The case with labour is similar. The rising natural resource activity can draw skilled labour, both technical and administrative, from elsewhere in the economy. Also, the kind of education and training that serves the needs of the natural resource industry--and which is often provided by government--can shape the labour force in ways that are less appropriate for other sorts of economic progress.
All of this might be viewed as the normal--and, indeed, positive--development of an economy. New industries are always replacing old industries in successful economic expansion, a process dubbed 'creative destruction' by Joseph Schumpeter. However, as pointed out above, in the case of natural resources, when those resources run out, or competing sources drive down the price, other activities might not be capable of filling the void. Also, as appears to have been the case in the Netherlands, when the labour intensity in the dominating activity is low, an employment problem may arise. Further, if the dominating activity has been developed with a high degree of government support, a situation akin to the running out of a natural resource can develop if government support is reduced. Moreover, when industrial change is driven by government actions, its consequences may not be the positive change implied by the concept of 'creative destruction.'
The role of the government in all of this is, of course, a political issue. When a particular activity in the economy becomes especially important, it can have excessive impact on government policy, policy that will serve its own interests perhaps to the detriment of other economic sectors. This phenomenon might be especially pronounced when much of the natural resource activity is undertaken by foreign firms or is heavily dependent on foreign financing.
Perhaps many of these processes are not so important in a relatively rich economy, such as that of the Netherlands, with a highly skilled labour force, a relatively stable political system, and internal sources of finance and operations for natural resource activity (think Royal Dutch Shell). Yet neither are they irrelevant. And in less-rich countries these processes, beyond the currency value issues, may help explain why a great natural resource success, or great success in some other particular activity, can have negative impacts on the overall economy. (1)
CONSIDER PUERTO RICO
Puerto Rico has none of the major oil, gas, and mineral natural resources that are generally associated with the Dutch Disease. And Puerto Rico has a manufacturing sector that is especially large in relation to the rest of the economy. During recent years, manufacturing has accounted for between 42% and 47% of GDP, but has provided only about 14% of jobs in 2004 and only about 8% in 2015 and 2016 (Junta de Planificacion 2007; 2016, Appendix Tables 9 and 33). (2,3) The contribution of mining to GDP and mining's share of employment have been less than 1%. This is not a typical picture of the Dutch Disease.
Moreover, if there has been any phenomenon like Dutch Disease in Puerto Rico, it has not operated through changes in currency values. Puerto Rico does not have its own currency, but is part of the U.S. dollar system. Economic activity within Puerto Rico and its external trade have virtually no impact on the value of the dollar in relation to other currencies.
Yet, the very large manufacturing sector in Puerto Rico--or, perhaps more precisely, the policies that have created that large manufacturing sector--appear to have had the impact of weakening other sectors of the island's economy. Instead of a Dutch Disease bringing about a weakness of manufacturing, as in the classic pattern, Puerto Rico's Dutch Disease has operated in reverse, with the expansion of manufacturing and the policies supporting that expansion bringing about weakness elsewhere.
The examination of Puerto Rico's Dutch Disease in reverse takes on special importance in light of the island's long-lasting recession, which emerged in 2006 and continues to this writing in 2017. Economic policy over several decades has created a bloated manufacturing sector and weakened other aspects of the economy. While various factors have contributed to the recession's emergence and duration, Puerto Rico's Dutch Disease in reverse has been an important contributing factor.
THE EMERGENCE AND CONTINUING DOMINANCE OF PUERTO RICAN MANUFACTURING
As is well known, in the decades following World War II, under the rubric of Operation Bootstrap (Operation Manos a la Obra), manufacturing had a great surge in Puerto Rico. This surge was stimulated by U.S. and Puerto Rican tax incentives designed to bring U.S. firms to the island--section 931 of the U.S. tax code, in particular. (4) Also, the surge was encouraged by a "pro-industrialization" ideology, widespread in low-income countries at the time, and championed in Puerto Rico by the first Puerto Rican governor, Luis Munoz Marin. (5) Also, and crucially, the expansion of manufacturing at that time was dependent on relatively low wages in Puerto Rico and the privilege of unhindered access to the U.S. market--not afforded to other low-wage sites.
The growth-impact of this program lasted into the 1970s, with GNP per capita increasing at an annual rate of roughly 5% through the 1950s and 1960s. (6) Moreover, in this period Puerto Rico was transformed from a rural-agriculture-based economy to an urban-manufacturing-based economy, as indicated by the figures in Table 1. Value added in manufacturing relative to GNP grew much more rapidly than employment in manufacturing as a share of total employment. In the 1970s particularly, while value added in manufacturing relative to GNP grew from 25% to 48%, employment in manufacturing as a share of total employment declined slightly. Moreover, as is implicit in the figures of Table 1, the decades from 1950 to 1980 saw manufacturing profits and dividends accruing to non-residents increase, roughly, from 2% as large as GNP to 30% as large as GNP, with the largest increase by far coming in the 1970s.
In 1976 the federal government enacted Section 936 of the U.S. tax code. Section 936 (continuing the essence of Section 931, which had played a role in the previous decades) made the profits of U.S.-based firms operating in Puerto Rico exempt from U.S. corporate income taxes, as long as those profits were not brought to the States. Section 936 would stay in full force until 1996; it was then phased out over the 1996 to 2006 decade. When 936 was phased out, many, if not all, U.S.-based firms that had operated under this provision of the federal tax code switched to coverage with another provision of the federal tax code--that of Controlled Foreign Corporations (CFCs). CFC status gave the firms tax advantages that were virtually the same as under 936 status, but the employment-generating aspects of 936--as limited as they were--were gone.
The federal tax incentives had all along been accompanied by Puerto Rico's own tax incentives. Law 73, "Economic Incentives for the Development of Puerto Rico Act," which was enacted in 2008 to update and expand these incentives, illustrates the general approach. Law 73 was established "with the purpose of providing an adequate environment and opportunities for the continued development of our local industry; providing an attractive tax proposal that appeals to foreign direct investments and fosters the economic development and social betterment in Puerto Rico..." (PRIDCO 2008, 1)7 Although Law 73 touches on many business activities, its essence--the focus on manufacturing--is captured by the description offered by "Business in Puerto Rico" (2017):
In order to bolster the manufacturing sector as well as other strategic areas, the Island Government has created an aggressive economic and tax incentives program with the purpose of helping operations on the Island become more profitable to those companies who manufacture here. Below are some of the tax benefits offered under Act 73:
* 4% income tax on industrial development income
* 0% to 1% tax rate on income for pioneer or novel products manufactured in PR
* Up to 50% tax credit on purchases of products manufactured or recycled locally
* Up to $5,000 for each job created during 1st year of operation
* Up to 50% tax credit on Research and Development activities
* Special deductions on investments from structures, machinery and equipment
* Marketing incentives program available to qualified PRIDCO-promoted companies whose sales are greater than $100,000 per year. (8)
The problem is that this approach to promoting economic development in Puerto Rico has not worked well. It has created a large manufacturing sector in terms of value added. However, as Table 1 indicates, most of this value added has been in the form of the profits of companies based off the island (primarily in the United States). (9) Also as indicated in Table 1, the manufacturing sector has not been a large generator of employment. Further, manufacturing has not been an engine of growth for the overall Puerto Rican economy. Although heavily integrated with the U.S. economy, Puerto Rico fell further behind the United States in the 1980 to 2000 period, with Puerto Rico's GNP expanding by 60% while GNP expanded by 90% in the States. (10)
THE NEGATIVE IMPACT
The dominance of manufacturing in Puerto Rico, a dominance based on federal and local government support through tax incentives, has had an impact on the weakness of other economic activities on the island.
A prime example is tourism. If Puerto Rico can be said to have any natural resource-based economic activity, tourism would stand at the top of the list. The island's climate and beaches, as well as ecologically interesting sites, offer opportunities that are akin to the opportunities offered by deposits of gas, oil, and other mineral resources elsewhere.
But, with its focus on manufacturing, the Puerto Rican government has done little to support tourism. A comparison with the Dominican Republic over the period since 1995 illustrates the point. Since 1995, Dominican Republic tourist arrivals have risen almost continually, while Puerto Rico's tourist arrivals have been relatively flat in this period. See Figure 1. In the same period, Dominican Republic government spending in support of tourism has also risen almost continually, while in Puerto Rico government spending has been relatively flat. See Figure 2. (11) Indeed Figures 1 and 2 show such similar trends in arrivals and spending that the two could be easily mistaken for one another.
The tourism success of the Dominican Republic compared to Puerto Rico might be attributed to the much lower wages in the former, making the costs to tourism much less. This cost advantage, however, existed throughout the period and cannot explain the change in the relative positions of the Dominican Republic and Puerto Fvico. Moreover, at least in part, the cost advantage might be balanced by Puerto Rico's advantage as part of the United States. (As Puerto Rico is a U.S. territory, no visa is needed for U.S. citizens, the U.S. dollar is the currency, and U.S. law has ultimate authority.) We are left with the data, which strongly suggest that the poor performance of tourism in Puerto Rico relative to that in the Dominican Republic is explained in significant part by the relatively meagre support for tourism provided by the Puerto Rican government.
The situation with agriculture in Puerto Rico provides another case where government neglect has contributed to poor performance. Although the transformation of the Puerto Rican economy from a rural-agricultural base to an urban-manufacturing base in the post-World War II decades has been viewed largely as a sign of rapid progress, two factors about this transformation need to be recognized.
* First, for better or for worse, this transformation was promoted by government policies, as noted above. Tax incentives for manufacturing, supported by a hyper-industrialization ideology, drove the change away from agriculture (to say nothing of the very large-scale migration to the United States). This was not a simple market-driven change, and not a classical process of Schumpeterian 'creative destruction.'
* Second, this transformation not only involved a diminution of Puerto Rican agriculture, but led to a virtual elimination of Puerto Rican agriculture, as value added in agriculture in 2016 was only 1.2% of GNP (and see Table 1). It is easy to maintain that the transformation--again, not a "natural" process, but one driven by policy--went too far.
In recent years, it is widely noted that Puerto Rico imports 85% of its food. While this figure might be somewhat of an exaggeration, there is no doubt that the island is very highly dependent on food imports. Of course, not all countries are able to grow a large share of their food, and, with its density of population and substantial mountain terrain, there is no reason to expect Puerto Rico to be a major agricultural power.
Nonetheless, as illustrated in Figure 3, the sharp decline in the percentage of Puerto Rico's land that is devoted to agriculture makes it an outlier by this measure. The percentage of Puerto Rico's land that has been devoted to agriculture fell from 69%, at the beginning of the 1960s, to 22% by 2007, and has stayed roughly at that level in subsequent years. (13) Beyond the particular countries used in Figure 3 to illustrate Puerto Rico's outlier position, in large aggregates of countries, land devoted to agriculture has increased since 1961, at least slightly: see Latin America and the Caribbean, East Asia, Sub-Sahara Africa, and the Middle East and North Africa. In the United States and in the European Union, land devoted to agriculture has declined, but not by a great amount--i.e., from 49% to 45% in the U.S. and from 55% to 44% in the EU countries (World Bank 2017b).
The long-term decline of agriculture in Puerto Rico has been a transformation from large-scale production of export crops--sugar, tobacco, coffee--to small-scale farms producing a great variety of crops. The small size of production units in recent years might be cited as the basis of Puerto Rico's weakness in agriculture (an alleged inability to compete with large operations in the United States). Small-scale agriculture, however, can be very productive if it is provided with support in terms of agricultural extension, marketing, and finance. Such services are not totally absent in Puerto Rico, but neither are they readily available at a sufficient level.
While data are available only from the beginning of this century, from 2000 onward the Puerto Rican government's support for its Department of Agriculture has been in decline, falling sharply relative to total government expenditures up to the emergence of the current recession, and then slowly declining further during the recession years. This decline is shown in Figure 4. (The high point was forty-three one-hundredths of one percent in 2001, and the figure fell to twenty-eight one-hundredths of one percent in 2013.) Also, aside from the direction of change, the low level of spending on the Department of Agriculture tends to indicate that it is given low priority by the government. (14)
Neither agriculture nor tourism would provide a panacea for Puerto Rico's economic problems. Together, these two sectors account for only between 4% and 6% of GNP (and less than 4% of GDP), though they account for a somewhat larger share of employment. Nonetheless, if their expansion were given reasonable support, they could likely make significant contributions to output expansion and, especially, employment growth. (15)
Manufacturing is generally viewed as the leading sector of the Puerto Rican economy, accounting for about 45% of GDP. However, in terms of employment, its role is much smaller, accounting for less than 10% of the total. Moreover, the largest firms in manufacturing, largely subsidiaries of U.S. firms, are those firms that have located operations in Puerto Rico and take advantage of federal and local tax incentives. Indeed, as James Dietz has pointed out, "Fomento's [i.e. the Puerto Rican Industrial Development Corporation's] efforts were aimed at attracting large, capital intensive, externally oriented U.S. multinational investors in pharmaceuticals, chemicals, and electronics ..." (Dietz 2003, 53).
The low employment rate (high capital intensity) of Puerto Rican manufacturing and the heavy role of U.S. multinational investors gives these firms limited motivation to be concerned about the development of a broad-based, high-quality educational system on the island. To the extent that local authorities are affected by the interests of these important investors, they are likely to be less motivated to assure continual improvement of the public education system.
The Puerto Rican population is often viewed as relatively highly educated with 24% of people twenty-five and over having a bachelor's degree or higher degree, as compared to 30% in the United States; and the figure for Puerto Rico is higher than for some individual states. However, in the population of Puerto Rico twenty-five and over, 27% have not attained a high school degree, while in the United States the figure is 13.3% and does not exceed 18% for any state (AFF 2017). These data suggests that, in terms of educational attainment, the Puerto Rican population has a bi-modal structure--i.e. a substantial share of the population is relatively highly educated (in terms of years of schooling), but also a substantial share, a larger share, has relatively little schooling. (16)
Years of schooling and degrees, however, are poor measures of the educational level of a population. The impact of schooling has to be taken into account, and all indications suggest that the Puerto Rican public schools do not generate strong academic accomplishments. For example, a test by which the performance of Puerto Rican public school students can be compared to the performance of students in the United States is the National Assessment of Educational Progress Mathematics exam (which is administered in Spanish in Puerto Rico). Results for public school students in Puerto Rico and the States are shown in Table 2 for 4th and 8th graders in 2003, 2005, and 2013. In all categories shown in the table, the performance scores of students in Puerto Rico are far below those of students in the States. For example, the average score for Puerto Rican 4th graders in 2013 was nine standard deviations below the score for the state with the lowest score. Whether it is poor quality of the schools, poor conditions outside the schools (e.g. widespread poverty and economic inequality), or some combination of both, the data suggest that Puerto Rican students are not coming out of the public schools as a fairly well educated labour force.
Aside from test scores, the actions of Puerto Rican families also indicate the poor accomplishments of the public school system. Table 3 shows the decline of enrolment in the public schools from 1980 to 2015. In recent years, some of this decline is the result of the large migration from Puerto Rico to the United States, resulting in a population decline of over 10%. Yet, the enrolment decline was going on well before the recession and migration. Also, the data in Table 3 show that a large part of the decline is due to parents lacking confidence in the public schools, and those who could afford to do so increasingly choosing private schools for their children. As the data in Table 3 indicate, about 30% of students in elementary and primary schools attend private schools. The comparable figure in the United States is about 10% (NCES 2017a). (17)
The Puerto Rican policy weakness with regard to public schools, evident in the data, is illustrated by the failure to deal with the bureaucratic condition of educational administration. Puerto Rico schools are administered as a single school district, exceeded in size (based on enrolment) by only New York City, Los Angeles, and perhaps Chicago (NCES 2008-9). Considerable evidence indicates, however, that large school districts are ineffective. Numerous studies show a positive correlation between district size (in terms of number of students) and poor student performance. Also, larger districts do not provide cost savings through economies of scale (Driscoll, Halcoussis, and Svorny 2003; Friedkin and Necochea 1988; Howley 1996 and 2000; Robertson 2007).
A specific example, indicating the bloated nature of school administration in Puerto Rico, is the share of per-pupil current expenditures that go to instruction. In Puerto Rico, the figure is 43.6%, while for the United States the figure is 60.8% and is 54.5% for the lowest state, Arizona (NCES 2016, Table 236.80).
Perhaps a broad-based, high-quality public education system is not essential for a manufacturing sector with a relatively small labour force, as is the case with Puerto Rican manufacturing. Schooling, however, if effectively organized and developed, provides a vital foundation for economic progress. It is a central aspect of an economy's social infrastructure. Yet, in Puerto Rico, policy makers act as though a public educational system that serves the great majority of students is not important.
It would be difficult, if not impossible, to find an economic justification for government to provide special favourable treatment--e.g. tax incentives, subsidies, tariff protection--of a particular activity over a seventy year period. One might appeal to the infant industry argument for a few decades, but not for seventy years. Yet, the U.S. federal government, along with the Puerto Rican government, has been providing special treatment for manufacturing on the island since at least the late 1940s. If the "infants" cannot manage on their own by this time, there is little reason to believe they ever will. Furthermore, the Puerto Rican government appears to desire to continue the favourable treatment of manufacturing indefinitely and asks the federal government to continue, indeed enhance, the policies of the past.
Perhaps the long-lasting recession that has plagued Puerto Rico since 2006 might provide the basis for an argument for giving special treatment to employment-creating activities. Yet, as has been pointed out here, manufacturing in Puerto Rico is not much of a job creator. Indeed, the Puerto Rican government's devotion to manufacturing appears to have inhibited the development of economic activities that are more labour intensive. The employment-generating examples of tourism and agriculture used here demonstrate the point. Also, the state of public education tends to reveal a lack of interest on the part of the government to build a labour force that could support diverse economic activity and drive balanced expansion of employment and economic growth. Relying on a tried-and-failed policy is hardly a prescription for bringing Puerto Rico out of the economic doldrums.
Puerto Rico's experience has been dubbed here as the Dutch Disease in reverse, with manufacturing as the bloated sector bringing about weakness elsewhere, instead of manufacturing being weakened by a bloated natural resource sector. Perhaps, however, an understanding of what is happening with the Dutch Disease, forward or in reverse, should be broadened. When a country or territory becomes highly dependent on a single industry or particular sector of its economy, especially when that sector has become bloated by government policies, over time the repercussions can weaken the whole economy.
The policy implications are relatively straightforward. The Puerto Rican and U.S. governments should recognize the limited role that manufacturing can play in the advance of the island's economy, and give attention to providing greater support for other realms of economic activity. This means moving away from the policy focus of continuing tax incentives for manufacturing, as that focus deprives those other realms of activity of the attention and support that they need. There is a role for some manufacturing in Puerto Rico, but not as the driver of economic expansion, as it has been in the minds--but only in the minds--of policy makers. A more balanced approach to economic development policy would likely yield more favourable outcomes.
I wish to thank Margery Davies, J. Tomas Hexner, John A. Miller, and Michaela Spampinato for advice and assistance in helping me prepare this article. Work for this article was funded by the International Institute for Advanced Studies (Cambridge, Massachusetts).
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World Travel and Tourism Council (WTTC). 2017. https://www.wttc.org/.U.S. Census Bureau. 2012. Statistical Abstract of the United States 2012.
(*) This article was written and submitted to Social and Economic Studies before the hurricanes devastated Puerto Rico in September 2017.
(1) Norway provides an exception, a country where careful management of a natural resource and of the revenues that come from that resource has prevented the negative Dutch Disease outcome. When oil was discovered, it helped that Norway was already a relatively high-income country and politically stable. Its government was able to establish a high tax rate on profits from oil and used the revenues to create a sovereign wealth fund that has invested to maintain a diversified economy and long-term security. See, for example, Hsieh (2013).
(2) By way of comparison, in the United States manufacturing's share of GDP in the past decade has varied around 12%, and its share of employment has been dropping from 10% in 2004 to 8% in 2014 (BEA 2017; BLS 2017).
(3) In many ways it is not appropriate to use GDP as a measure of the size of the Puerto Rican economy. There is a large gap between Puerto Rican GDP and GNP, with the former about 50% larger than the latter in recent decades. (Few countries have such a large GDP-GNP gap; Puerto Rico is an outlier.) The difference is largely accounted for by the high level of profits accruing to firms based in the United States and in foreign countries--especially manufacturing firms. These profits count in GDP but not GNP. A sizable share of these profits do not derive from activity in Puerto Rico, but is the result of transfer pricing employed by firms to locate profits in Puerto Rico because of the favourable tax treatment. Also, and perhaps more important, the large pharmaceutical firms (and others) locate ownership of patents with their Puerto Rican subsidiaries, and the income from these patents thus shows up in Puerto Rico; again, the motivation is tax treatment. Thus a great deal of GDP, including a large share of the value added in manufacturing, does not go to either Puerto Rican individuals or firms. For a discussion of related issues, see Ruiz and Melendez (1998).
(4) "Federal corporate tax exemptions [for U.S. firms operating in Puerto Rico] had been in place as far back as the Foraker Act of 1900. Under Section 931 of the U.S. Internal Revenue Code, U.S. corporations were exempt from paying taxes on their profits until they repatriated them to the United States. Local income taxes on corporations, however, all but nullified the federal tax exemption until 1947. As part of the administration's strategy to stimulate industrialization and growth, and having acknowledged the importance of foreign investment to achieve this goal, it passed the first Industrial Incentives Act in May 1947, which eliminated the Puerto Rican corporate tax" (Ruiz Toro 2013).
(5) For a prescient critique of Munoz Marin's approach and its impact, see the college senior thesis of now U.S. Supreme Court Justice Sonia Maria Sotomayor. Sotomayor recognizes that Operation Bootstrap allowed the Puerto Rican economy to improve in absolute terms, but argues that it failed because it"... was based on a negation of self-sufficiency and an acceptance of utter dependency on the colonial master, the United States. Manufacturing firms in Puerto Rico were almost completely export oriented to the mainland market.... Puerto Rico was also dependent on the United States for its investment capital" (Sotomayor 1976, 98).
(6) Calculated from data in Dietz (1986, Tables 5.1 and 5.16).
(7) Attesting to the history of this tax incentive approach to development in Puerto Rico, Law 73 continues: "... Puerto Rico has a trajectory of more than 60 years of capital investments promoted by its industrial incentives program ... Act No. 135 of December 2,1997, as amended, known as the "Tax Incentives Act of 1998", was no exception. Said Act incorporated a significative [sic] change in the focus of industrial promotion, because it effectively embraced the 'controlled foreign company' structures model, which became more pertinent when certain federal incentives were eliminated [i.e., Section 936, which was phased out over the 1996-2006 years]."
(8) PRIDCO is the acronym for the Puerto Rican Industrial Development Corporation.
(9) Underscoring this point, in 2000, well before the onset of the continuing recession, 82% of value added in manufacturing was proprietors' income (net profits and net interest). Moreover, proprietors' income in manufacturing accounted for 61% of all proprietors' income in GDP. After a decade of continuing economic decline, in 2016, 92% of value added in manufacturing was proprietors' income, and proprietors' income in manufacturing accounted for 68.0% of all proprietors' income in GDP (Junta de Planificacion 2007; 2016, Table 11).
(10) This GNP comparison has been calculated for Puerto Rico from Dietz (1986, Table 5.1) and Junta de Planificacion (2002, Table 3), and for the United States from BEA (2010).
(11) The measure of government spending support for tourism, from the World Travel and Tourism Council (WTTC 2017) includes two categories of spending: (1) "Government Collective Spending: Government spending in support of general tourism activity. This can include national as well as regional and local government spending. For example, it includes tourism promotion, visitor information services, administrative services and other public services." (2) "Government Individual Spending: Government spending on Travel & Tourism services directly linked to visitors, such as cultural services (e.g. museums) or recreational services (e.g. national parks)."
(12) The 85% figure is reported by Javier Rivera, Secretary of Agriculture in the Forturio administration in an on-line Latin American Herald Tribune article, undated but clearly published in the 2009 to 2012 period (LAHT undated). And an October 8, 2015, report from the U.S. Department of Agriculture's National Institute of Food and Agriculture quotes Dr. Myrna Comas Pagan, Secretary of Puerto Rico's Department of Agriculture, saying, "We needed to develop a food security plan for the island. Our island depends on food imports--that's a point of vulnerability. We have a critical situation." The article (not the Comas Pagan quotation) continues, "Puerto Rico imports about 85 percent of its food from 52 countries" (NIFA 2015). My own calculations, comparing data on food imports with expenditures on food consumption suggest a somewhat smaller import share. However, without knowledge of the markups on the various food imports, it is not possible to make a meaningful calculation, and no source is supplied to support the statements by the Secretaries of Agriculture.
(13) Pares-Ramos, Gould, and Aide (2008), examining the period of substantial decline in land devoted to agriculture in the 1990s (see Figure 3), point out that while some of the decline is attributable to urbanization, a much larger share has involved an increase in forestation. Much of the decline is explained by abandonment, which resulted in conversion to grasslands and then from grasslands to forest. Also see Gould et al. (2017).
(14) While the data shown in Figure 4 does suggest a low priority given to agriculture by the government, it needs to be noted that the U.S. Department of Agriculture is active in Puerto Rico, with its net operating expenditures in Puerto Rico exceeding the budget of the Puerto Rican Department of Agriculture in almost all years from 2000 to 2014 and sometimes more than twice as large. Also, in this 2000 to 2016 period, the U.S. Department of Agriculture has provided grants to Puerto Rico for agricultural extension and the agricultural experiment station of $10 to $12 million annually until 2005, after which the grants fell off sharply to below $1 million in 2015 and 2016 (Junta de Planificacion 2007; 2016, Tables 20 and 22).
(15) Various small agricultural programs are underway and changes that might prove significant are taking place, leading to some reports of major developments. For example, according to an NBC news report: "For the first time in nearly 30 years, Puerto Ricans are buying rice, vegetables and traditional crops such as plantains and pineapples, that are produced on the island. As new farms spring across the island, the U.S. territory is seeing something of an agricultural renaissance ... 'More and more people have noticed that this is one of the only successful ways of living on the island right now,' said Tara Rodriguez Besosa, a farming advocate and owner of an organic restaurant in San Juan...Agriculture is a small part of the economy in Puerto Rico ... Yet the growth is notable simply because things are so bad overall" (NBC News 2016). These changes, however, might be ephemeral results of hard times, and they would need to be scaled up significantly to alter the trend evident in aggregate statistics.
(16) Of course, part of the explanation of the low level of high school completion in Puerto Rico is that schooling has expanded more recently than in the States, and thus it is largely among the elderly that the rate of high school completion is low. Nonetheless, these data needs to be considered as part of the whole story of the labour force's level of education.
(17) When public school attendance falls as far as it has in Puerto Rico, the spectre arises of a negative downward spiral. As public school enrolment falls, support for public education tends to fall. As support falls, quality tends to fall. If quality falls, more families send their children to private schools. And so on.
Table 1: The Structural Shift from Agriculture to Manufacturing 1950 1960 1970 1980 2000 Value Added 17.5% 9.8% 3.4% 3.6% 1.3% Relative to GNP (*) 15.9% 21.9% 25.4% 48.1% 58.1% Agriculture Manufacturing Employment (000s) 214 124 68 40 24 and % of total 35.9% 22.8% 9.9% 5.3% 2.1% Agriculture Manufacturing 55 81 132 143 156 9.2% 14.9 19.2% 19.0% 13.6% Net Contribution to 13.9% 17.4% 16.7% 18.2% 9.1% (**) GNP of Manufacturing (**) 2016 Value Added 1.2% Relative to GNP (*) 70.8% Agriculture Manufacturing Employment (000s) 16 and % of total 1.6% Agriculture Manufacturing 84 8.5% Net Contribution to 21.1 (**) GNP of Manufacturing (**) (*) As noted (see footnote 3), a large share of profits in manufacturing go to non-residents (firms and individuals) and are not part of GNP (but are part of GDP). (**) Manufacturing's net contribution to GNP is the total value added in manufacturing minus profits and dividends paid to non-residents. For 2000 and 2016, it was assumed that the entire difference between GDP and GNP was such profits and dividends from manufacturing. Source: For 1950-1980, (Dietz 1986: Tables 5.5, 5.6, and 5.7). For 2000 and 2016, (Junta de Planificacion 2007 and 2016: Appendix Tables 1, 9, and 33). Table 2: National Assessment of Educational Progress, Mathematics, Results for Puerto Rico, the United States, 2003, 2005 and 2013, and State with Lowest Score, 2013; and for 2013, Percent Performing at or above "Basic" and Percent Performing at or above "Proficient" Average Score for Puerto RicoAverage Score for States 4th Grade 8th Grade 4th Grade 8th Grade 2003 178 234 234 276 2005 183 218 237 278 2013 182 218 241 284 2013 State with Lowest Score 4th Grade 8th Grade 2003 2005 2013 231 269 (Miss.& Mont.) (Ala.) Percent at or above "Basic" Puerto Rico States Lowest State 4th Grade 11% 82% 74% (Miss.) 8th Grade 5% 73% 60% (Ala.) Percent at or above "Proficient" Puerto Rico States Lowest State 4th Grade 1% (*) 41% 26% (Miss) 8th Grade 1% (*) 34% 20% (Ala) (*) Reported as "one percent or less." Sources: For 2003 and 2005 (NCES 2007) and for 2013 (NRC 2017a and 2017b) Table 3: Enrollment in K-12 Schools in Puerto Rico, 1980-2015* Total Enrollment In Public Schools (in thousands) (in thousands) (percentage of total) 1980 811.3 716.1 88.3 1985 795.6 692.9 87.1 1990 797.0 651.2 81.7 1995 767.3 621.4 81.0 2000 796.0 612.3 76.9 2005 750.7 575.6 76.7 2010 703.0 493.3 70.2 2012 588.4 434.6 73.9 2015 n.a. 411.0 n.a. (*) The different sources for the most recent years and the lack of systematic collection of data for private schools limit the reliability of the changes in the total and percent in public and private schools from 2010 onward. Source: For 1980-2010, (U.S. Census Bureau 2012: Table 1321); for 2012, (CAFR, 2012: 299); for 2015 (NCES 2017b).
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|Publication:||Social and Economic Studies|
|Date:||Sep 1, 2017|
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