III.

Economy

For its first 250 years as a Spanish colony, Puerto Rico was largely a military establishment fortified to protect the sea lanes between Spain and its American colonies. Most farms were small, and farmers raised subsistence crops, such as vegetables, rice, plantains, and corn. By the end of the 18th century, export crops began to play an important role in the economy. Puerto Ricans exported sugar, coffee, tobacco, and cotton, as well as meat, animal hides, and other items. The economy grew during the 19th century, but agriculture remained dominant. Coffee, tobacco, and sugar became the most valuable export crops during the 19th century. Puerto Rico traded mostly with Spain and other European nations.

When the United States gained control of the island following the Spanish-American War, it became the new market for the island’s coffee. However, U.S. residents were used to the weaker Brazilian coffee bean and did not appreciate the richer, stronger Puerto Rican variety. Puerto Rico was also struck by two hurricanes in 1899 and 1928, which decimated the island’s coffee crops. As a result, sugar replaced coffee as Puerto Rico’s main export crop after 1900. The U.S. government allowed the island’s sugar to enter the U.S. market tax-free. United States financiers invested heavily in Puerto Rican sugar estates. By 1930 the island’s sugar production had risen by a thousand percent, and almost all of it was exported to the United States. By 1940 the sugar industry employed 25 percent of the island’s labor force. As the sugar industry grew, corporations bought large tracts of land for sugar estates. Many of Puerto Rico’s independent, land-owning farmers went out of business because they could not compete with the corporations.

Puerto Rico transformed its economy after World War II (1939-1945). In an attempt to make the island less dependent upon agriculture and to increase employment opportunities, Puerto Rico’s leaders decided to emphasize industrial development. With the help of the U.S. federal government, in 1947 the Puerto Rican government established Operation Bootstrap, a program of governmental support for industry through tax breaks. The government hoped to attract industries that would import goods to the island to be finished for export. The Puerto Rican government also worked to develop the tourist industry. It invested directly in the construction of the Caribe Hilton, a large hotel in San Juan that received immediate international recognition. In addition to its economy, Puerto Rico worked to improve its health services, housing, education, and electric power.

Operation Bootstrap was a success. It brought many industrial companies to Puerto Rico and created thousands of jobs. Puerto Rico transformed from an underdeveloped island into an industrialized area and an important overseas markets for the United States. By 1965 Puerto Ricans enjoyed the highest per capita income (average individual income) in Latin America. Economic improvements were visible everywhere in the form of new housing, public buildings, and service facilities; new and improved roads and communications; modern factories; and the availability of a higher quantity and quality of food and clothing.

Puerto Rico’s economy experienced a downturn in the mid-1970s. A severe recession in the U.S. economy resulted in fewer U.S. purchases and investments and a decline in tourism on the island. At the same time, worldwide inflation made imported goods, especially oil, more expensive. Moreover, U.S. minimum wage laws and the island’s increased prosperity had resulted in a higher wage level. Higher wages made Puerto Rico less able to compete with other developing areas for labor-intensive, low-capital industries. After rising steadily for years, the gross domestic product (GDP, the total value of goods and services produced in Puerto Rico) and total employment declined in 1975. However, even during the boom years, unemployment remained high, generally ranging from 10 to 13 percent of the labor force. By the mid-1970s, the official unemployment rate had reached 20 percent.

In the late 1970s the economy made some progress, only to be buffeted by recession again in the early 1980s. By the mid-1980s, the island’s economy began to recover. It benefited when the United States increased its investment to the region through the Caribbean Basin Initiative, a program providing tax-free access to U.S. markets for certain products from the Caribbean region. However, in 1996 the U.S. Congress voted to eliminate over a ten-year period the tax incentives for American companies investing in businesses in Puerto Rico. In response, local officials sought to further develop the service industry, especially tourism. In 1997-1998, 76 percent of Puerto Rico’s labor force worked in the services, 22 percent worked in industry, and 2 percent worked in agriculture. In the GDP for the same time period, industry made up 79 percent, services made up 20 percent, and agriculture made up 1 percent.

A.

Agriculture

Once the backbone of the economy, agriculture has become less important in Puerto Rico. Less land is under cultivation, and farmers are producing fewer major crops. Farming has stagnated chiefly because large-scale investment has gone into industry rather than agriculture. In 1947 almost 40 percent of the labor force worked on farms. Only about 5 percent worked on farms by 1978; by 2005 agriculture employed 2.1 percent of the island’s workforce and produced less than 1 percent of the GDP.

By the end of the 20th century, the Puerto Rican government had encouraged agricultural diversification away from the traditional export crops of coffee, tobacco, and sugar. By the 1990s dairy, cattle, and poultry farming had outstripped those traditional crops as money earners. Although fruits and vegetables were grown for local consumption and tropical fruits were exported to Europe, Japan, and the U.S. mainland, Puerto Rico still imported most of its food from the United States.

B.

Fishing and Forestry

Much of Puerto Rico’s original forest cover was cut by 1900. Despite concerted efforts after 1935 to replant trees, the forestry industry remains small. Commercial fishing plays a relatively minor role in Puerto Rico’s economy. Tuna species caught include yellowfin, skipjack, and bluefin. Small-scale freshwater fish farming is a growing economic activity. Fish raised include bass, bluegill, and catfish.

C.

Mining

Almost all of Puerto Rico’s mineral production consists of construction materials, notably sand, gravel, stone, and material used in the manufacture of concrete. Other minerals are clay, graphite, lime, and salt.

D.

Manufacturing

Over the course of the 1980s and 1990s, manufacturing’s portion of the island’s labor force declined from 20 percent to 15 percent by 1999. Nevertheless, manufacturing produced in 1999 about $26 billion, which amounted to 70 percent of the GDP. In terms of employment, one of Puerto Rico’s leading manufacturing industries is apparel making. A modern apparel industry evolved from a small-scale labor-intensive needlework industry of the 1940s. By the 1990s most apparel plants were branches of mainland U.S. firms. San Juan and Mayagüez are the leading centers for making clothing. Large numbers of workers also produce chemicals, electronic equipment, and processed foods. Other major manufactures include pharmaceuticals, industrial machinery, printed materials, rubber and plastics, metal items, furniture and fixtures, and leather products.

Since the 1940s the government has encouraged manufacturing by offering incentives such as tax exemptions, loans, and research assistance. The leading government agency for encouraging industrial development was the Economic Development Administration, created in 1950 and generally known as Fomento (Spanish for “development”). Fomento’s mandate was to attract manufacturers to the island. To carry this out, Fomento sold or leased plants on favorable terms. In addition, the government waived business income tax dues for several years. Many large American manufacturing companies established plants in Puerto Rico, attracted by tax benefits and wages that were lower than on the mainland. In the 1990s the Puerto Rican Industrial Development Company (PRIDCO), a subsidiary of Fomento, became responsible for the industrial development of Puerto Rico.

In 1996, as part of budgetary cutbacks on the mainland, the U.S. Congress voted to eliminate over a ten-year period the tax incentives for American companies investing in businesses in Puerto Rico. To counteract the economic losses caused by the phase-out, the Puerto Rican government established a series of local tax incentives to keep or attract new companies to the island. These included a maximum 7 percent business income tax rate, tax incentives for research and development, and deductions for the costs of job training.

E.

Tourism

The year-round warm climate in Puerto Rico and its abundant sunshine and coastal beaches attract millions of tourists each year. Tourists were an insignificant source of income before 1940, but the Puerto Rican Tourism Company has promoted tourism with great success. A little over 3.7 million tourists visited the island in 1999. Some 1.3 million tourists arrived via cruise ships. Their primary destination is the San Juan area, the location of numerous luxury hotels. In 1992 the island had 8,400 hotel rooms, but by 2001 this number had increased to 12,400 rooms. This expansion greatly helped not only the tourist industry but the construction industry as well. Tourists spent $1,205 million in 2006.

F.

Transportation

Puerto Rico is the transportation hub of the Caribbean. The island’s international airport, Luis Muñoz Marín International Airport in San Juan, is one of the largest and busiest in the Caribbean. Local airline service links San Juan with the other cities on the island as well as with various points in the Caribbean. International airlines connect San Juan with the Americas and Europe. The San Juan port facility is among the top ports in the world for container shipping.

Although transportation facilities have been expanded to meet the requirements of the expanding Puerto Rican economy, transportation facilities outside of San Juan are generally much poorer than on the mainland United States. Trucks move most internal business traffic, and the island’s limited railroad system hauls sugarcane.

G.

Communications

In 2002 Puerto Rico had 47 AM and 32 FM radio broadcasting stations and 10 television stations, and cable television is available. The commonwealth’s first radio station, WKAQ in San Juan, began operations in 1922. WKAQ-TV in San Juan, Puerto Rico’s initial television station, first went on the air in 1954. La Gaceta de Puerto Rico, the island’s first newspaper, was initially published in 1807. Influential newspapers in Puerto Rico now include the Spanish-language El Nuevo Día and El Vocero de Puerto Rico and the English-language San Juan Star, all published in San Juan.

H.

Trade

The island’s economy has become increasingly integrated into the U.S. economy. In 1998 about 90 percent of Puerto Rico’s exports went to the mainland and 60 percent of imports came from there. Other significant markets are the Dominican Republic, Japan, Germany, and Venezuela, which provides much of the crude oil imported to the island.

The volume of trade soared and the makeup of exports changed drastically in the late 20th century. In 1940 exports were valued at $92 million and were largely made up of traditional agricultural products, such as sugar and tobacco, and handicrafts, such as needlework. In 1999 exports were valued at $28 billion and consisted chiefly of chemical products, a wide variety of manufactured articles, refined petroleum and derivatives, and agricultural products. Imports were valued at $21 billion in 1998. Manufactured goods, chemical products, transport equipment, and food were the leading imported commodities.