Regional development and water resource management

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Regional development and water resource management implications of a changing agricultural sector on Puerto Rico's south coast
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ix, 250 leaves : ill. ; 28 cm.
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Morris, Gregory L
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Irrigation -- Puerto Rico   ( lcsh )
Water resources development   ( lcsh )
Agriculture -- Puerto Rico   ( lcsh )
Environmental Engineering Sciences thesis Ph. D
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Thesis:
Thesis--University of Florida.
Bibliography:
Bibliography: leaves 225-238.
Statement of Responsibility:
by Gregory Lee Morris.
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Typescript.
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Vita.

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Full Text











REGIONAL DEVELOPMENT AND WATER RESOURCE MANAGEMENT:
IMPLICATIONS OF A CHANGING AGRICULTURAL SECTOR
ON PUERTO RICO'S SOUTH COAST








BY

GREGORY LEE MORRIS


A DISSERTATION PRESENTED TO THE GRADUATE COUNCIL OF
THE UNIVERSITY OF FLORIDA
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF DOCTOR OF PHILOSOPHY





UNIVERSITY OF FLORIDA


1979















ACKNOWLEDGMENTS


The assistance of the members of my committee is gratefully

acknowledged. In particular, I wish to acknowledge the patient and

encouraging assistance I have received from my chairman, Dr. Kylstra,

and my long-standing inspirational debt to Dr. Odum. I also appre-

ciate the understanding demonstrated by my committee in accepting my

five years of commuting between Gainesville and Puerto Rico as I at-

tempted to balance job responsibilities and income against research

requirements and expenses.

I owe a great personal debt to Douglas Pool. He was

responsible for introducing me to Puerto Rico, and has served as a

reliable and helpful friend. He also single-handedly ran a

difficult agricultural venture during my unexpectedly long absence

from the island while bringing this research to its conclusion.

There are many individuals on the island, too numerous to

name, who have offered readily of themselves and provided personal

insights into the social, cultural and political aspects of Puerto

Rico. These include many friends at the Department of Natural Re-

sources in San Juan, the Tirado family, Janet Weiss, Hugh Thorne, and

my dedicated friend and companion, Miriam Pab6n.

From my family in Sarasota I have received financial aid

and friendly advice and support at the most timely moments. In










Gainesville, my sister has provided three years of accommodations,

airport limousine service, and good humor.

Finally, I am fortunate to have the very professional typing

services of Sofia Kohli ("Superfish"). Her experience and ability

facilitated the preparation of the final document immeasurably.















TABLE OF CONTENTS


Page
ACKNOWLEDGMENTS . .. .... .. .. ii

ABSTRACT . .... .. . .. vii

CHAPTER I: INTRODUCTION AND OVERVIEW . .. 1

Problem Statement . .. 1
Methods of Regional Analysis . 3
Input-Output . 3
Neoclassical Growth Models . 5
Simulation Models . 8
Previous Resource Studies in Puerto Rico 0
Study Methodology . 12
Regional Development Model .. 12
Resource Management Model .. 13
Report Organization . .. 14

CHAPTER II: STUDY AREA DESCRIPTION . .. 16

Location . . 16
Physical Setting . 19
Geology . . 19
Vegetation and Land Use .. 19
Climate and Hydrology . .. 21
Socioeconomic Setting . .. 33
History . . 33.
Socioeconomic Objectives .. 37
Socioeconomic Conditions .. 38
Institutional Framework . .. 43

CHAPTER III: REGIONAL MODEL .. . 48

Population Sub-Model . .. 52
General Equations . .. 52
Fertility . . 55
Mortality . . 61
Migration . . 63
Economic Sub-Model . .. 74
General Equations . .. 74
Productive Capital . .. 75









TABLE OF CONTENTS--Continued


Page

Production Relationships ... 95
Economic Dependence . 112
Population and Economic Linkage ...... 116
Employment . . 117
Labor Force .............. 117
Unemployment and Migration ... 119
Model Calibration . ... 120
Regional Model Simulation Results .. 122

CHAPTER IV: WATER MANAGEMENT MODEL ... .. ...... .131

Supply Curve for Water . .... 132
General Considerations ... 132
Supply Curve Construction ... 133
Demand Curve for Water . .... .140
General Considerations ... 140
Municipal Water . .... .142
Industrial Water . ... 145
Recreation and Natural Systems .. 150
Agricultural Water Demand ... 151
Existing Conditions .......... 151
Water Demand in the Sugar Industry 153
Water Demand by Non-Sugar Crops .... 166
Aggregate Irrigation Demand ...... 169
Changing Pattern of Irrigation Demand 175
Water Management Model . .... .178
Safe Yield Criteria .......... 179
Water and Salt Budget . .. 179
Model Assumptions and Equations .. 183
Water Resource Scenarios ... 192
Model Results . 194

CHAPTER V: DISCUSSION . .... 197

Development Objectives ........... 197
Alternative Development Patterns ... 201
Feasibility of Development Alternatives 201
Alternative Development Patterns in
Agriculture . .... .204
Resource Implications of Agricultural
Change. ... . 207
Management Changes . .. 207
Institutional Needs and Constraints 209
A Proposal for Resolving the
Institutional Problem ... 212











TABLE OF CONTENTS--Continued


CHAPTER VI:










REFERENCES

APPENDIX A:

APPENDIX B:

BIOGRAPHICAL


SUMMARY, CONCLUSIONS, AND RECOMMENDATIONS

Summary and Conclusions .
Overview . .
Regional Growth .
Resource Management .
Recommendations . .
Entrepreneurship .
Agriculture . .
Water Management .



CAPITAL STOCK ESTIMATE FOR PUERTO RICO

REGIONAL MODEL EQUATIONS .

SKETCH . . .


Page

. 217

*. 217
S. 217
* 218
*. 220
* 223
. 223
. 223
. 224

. 225

. 239

. 244

. 249










Abstract of Dissertation Presented to the Graduate Council
of the University of Florida in Partial Fulfillment of the
Requirements for the Degree of Doctor of Philosophy


REGIONAL DEVELOPMENT AND WATER RESOURCE MANAGEMENT:
IMPLICATIONS OF A CHANGING AGRICULTURAL SECTOR
ON PUERTO RICO'S SOUTH COAST

By

Gregory Lee Morris

March 1979
Chairman: Chester D. Kylstra
Major Department: Environmental Engineering Sciences

As provided by the Water Resources Council's "Principles and

Standards," resource management in the United States is conducted

with the objective of providing for increases in income and maintenance

of environmental quality. However, these criteria inadequately express

development goals in Puerto Rico, where a development policy aimed

principally at providing increases in income and industrialization

through capital importation and increases in transfer payments have

served to greatly increase the island's level of economic dependency.

Over 25 percent of all income on the island was derived from unilateral

federal transfers by 1977. The savings rate in the island's private

sector has decreased and is now negative, with income increases being

used to support higher levels of debt rather than increases in produc-

tive investment.

A simulation model is constructed based on theoretical rela-

tionships to examine these development patterns. It is shown that

continuation of existing development patterns may provide long-run










increases in income and employment, but that this may be accompanied by

even higher levels of dependency. Under these conditions public

sector resource decisions based on income and employment will only

perpetuate these undesirable patterns.

These patterns can be broken only through the promotion of

local investment and entrepreneurial activity. A prime sector for

the promotion of entrepreneurship is the island's backwards agricultural

sector, which stands in stark contrast to the modern industrial sector.

Most of Puerto Rico's mechanizable lands, and nearly all irrigated

lands on the semi-arid south coast, are planted in sugarcane on govern-

ment operated farms. The government sugar industry suffers losses of

approximately $500 per acre per year. In response to these losses,

and in the interest of promoting agricultural modernization, government

policy has recently been implemented to lease government sugar lands

to private growers for the production of non-sugar crops.

Hydrologic and irrigation conditions on the south coast are

described, showing that a significant portion of the economic problems

in the sugar industry may be attributed to archaic irrigation practices.

Private farms are expected to be characterized by increasing irrigation

efficiency, which could increase the rate of consumptive use and

decrease recharge from irrigation percolation, creating an unfavorable

water balance in the already heavily drafted south coastal aquifer.

The conversion from sugarcane to diverse seasonal crops will also

create the potential for economically efficient transfers among private

farms.


viii










Existing water management institutions in Puerto Rico are

poorly adapted to accommodate these changes in irrigation management.

The primary problem lies in the lack of accountability which the

resource manager has toward the resource user. An institutional

framework is synthesized in this research which is aimed at improving

this accountability through creation of a local water management insti-

tution which will be capable of providing for long-term as well as

seasonal transfers among users in response to changing crop patterns

and economic demand.















CHAPTER I

INTRODUCTION AND OVERVIEW


Problem Statement

Regional growth creates changes in patterns of natural

resource utilization. By understanding these changes and their

implications, management policies may be implemented to increase the

value of resources to society. This value to society is determined

by the contribution which a particular resource use makes to patterns

of regional development which are themselves perceived to be desirable.

Thus, regional development and resource management policies are

intimately linked to one another. Changing development policies and

patterns of growth can foster changes in resource allocation. This

in turn, can create the need for revised resource management policies

and institutions. Conversely, the development policy itself must be

formulated within the constraints imposed by the region's resource

base.

The relationship between changing regional development

strategy and water resource management in Puerto Rico is examined.

Following three decades of intensive development effort, Puerto Rico

in the 1970s has high levels of unemployment and has become increas-

ingly dependent on growth in transfer payments from the federal

government, which now equal 26 percent of the island GNP. A majority










of business earnings are now remitted to non-residents, reinforcing

the island's dependence on capital imports. Some of the changes in *

development policies needed to deal with the conditions will also

require changes in patterns of resource use and management policies.

A regional development model for Puerto Rico is constructed

and simulated to examine growth patterns under current and alternative

development strategies over the period 1947-2020. It is asked

whether the strategy of industrialization, emphasizing heavy reliance

on capital imports and transfer payments, can generate patterns of

development which are consistent with the island's long-run goals,

i.e., to reduce unemployment, increase income levels, and increase the

island's economic self-reliance.

Changes in regional development patterns may modify patterns

of resource use. This relationship between a changed regional

development strategy and water resource management is explored for

Puerto Rico's semi-arid south coast. Models of water resource use are

constructed and used to suggest some of the water management implica-

tions of new development policy, focusing on the potential effects of

changing irrigation management accompanying the shift from unprofit-

able sugarcane production on government-managed plantations to the

profitable production of non-sugar crops on numerous smaller private

farms.

The hydrologic changes are assessed from supply and demand

conditions and a water management model. The water management model

is run over a period of 25 years to define those changes in ground










water withdrawal, consumptive use in agriculture, and artificial

recharge which could create an unfavorable water or salt balance.

These results are used to suggest institutional changes which are

needed to accommodate these changing water management conditions.


Methods of Regional Analysis

A variety of quantitative analytical models may be utilized

to examine regional growth patterns and potential, including export

base, cumulative causation, industry structure analysis, shift share

analysis, etc. However, many of these models have serious theoretical

or operational weaknesses and cannot be used to directly address the

specific relationship of resource infrastructure to the regional

growth process. Three types of models which have been used to

evaluate the role of resources in regional growth are discussed:

input-output, neoclassical growth models, and simulation modeling.


Input-Output

The input-output (I-0) framework is a matrix of the linkages

among the sectors of the existing economic system. Utilizing an I-0

model an analyst can examine the response of all sectors of the

economy to any initial changes which it is desired to test. In its

static form the technologic structure of the system is held constant.

The conversion of a static I-0 model to a dynamic framework requires

not only the conversion of the model's internal structure, but also

requires that the exogenous sectors change. Richardson (1973) has

suggested that a separate model might be constructed to generate the










changes in exogenous variables over time which would be required for

the dynamic operation of an I-0 model. When used as a dynamic tool

the analyst makes judgmental estimates of the changes in the

coefficients which may occur over time, plus the effect of changing

technology and substitutions on both the input and the output sides.

Changes in industrial mix and other "add-ons" are required to make

this static model perform in a dynamic framework.

Input-output techniques were used by Kelso et al. (1973) to

study the effects of a declining water resource base on the Arizona

economy. These declines are being caused by withdrawals from desert

aquifers in excess of recharge rates, resulting in declining ground

water availability. In its dynamic form the structure of this I-0

model was altered in accordance with a variety of different growth

scenarios to show the possible effects of water shortage on the economy

over a 50-year period.

Serious impediments to the implementation of an I-0 model are

the lack of readily quantifiable available data and the amount of

time and expense involved in data collection. Puerto Rico has

detailed information on inter-regional trade, a serious data deficiency

in most regions, and has had several I-0 models constructed over the

past 15 years. However, in these models the agricultural sector is

aggregated and the role of irrigated agriculture is thereby masked.

There is also considerable uncertainty as to the stability of the

pattern of I-0 linkages in Puerto Rico's economy over the long run.

Other general weaknesses of the I-0 model include the assumption of










linear relationships throughout and the essentially ad-hoc procedures

which are necessary to convert it to a dynamic framework.


Neoclassical Growth Models

Lewis et al. (1973) emphasized the general inadequacy of the

regional growth models formulated todate, and underscored the need

to gain an improved understanding of regional growth processes as a

prerequisite to being able to predict the effect of water resource

investment (or any other investment) on a region's economy. They

proposed that an adequate regional model should explicitly consider

the sources of regional growth and interactions among those growth-

promoting factors, with particular emphasis on those factors which

are amenable to policy manipulation. Inasmuch as no general type of

analytical framework exists which can adequately account for the

variation among structures and growth processes in different regions,

it was stressed that each regional model would require separate syn-

thesis.

Lewis et al. (1973) proposed that regional economic charac-

teristics could be described using a neoclassical production function

model of the type


Q = f(K,R,L,T)

where


Q = output,

K = capital,










R = resources, including land,

L = labor, and

T = technological advance.


This relationship may be solved for the marginal products of each input

factor:


3Q; aQ,; D; DQ;
3K' aR' 3L' aT'


or it may be rewritten in the growth accounting form:


q = ak + Br + c9 + t

where


q = -; k = K; r = ; A = AL. and t = A
Q K R L Q

AQ' = output increase from technological advance


The elasticities of production for K, R and L, respectively, are a,

a, and e. These elasticities represent the percentage change in output

corresponding to a percentage change in the respective input factor,

e.g.,


3Q K
a MK Q


Under the assumption of perfectly competitive factor and

product markets and full utilization of resources (i.e., full employ-

ment), it can be shown that the marginal revenue product of each factor










is equal to its marginal product times the product price. As summar-

ized by Denison (1974, p. 51) in his growth accounting study:

If a small percentage increase in the number of units of
all of the factors would increase output of the sector
by x percent, then a percentage increase of the same
amount in the number of units of only one factor would
increase output by x times the share of that factor
in total earnings in the sector.

Richardson (1973), however, has opposed using the neoclassical

approach in regional growth analysis, noting that several of the

theoretical assumptions made in computing the elasticities of factor

inputs are unrealistic at the regional level. Perhaps the most

serious defect is the assumption of full employment. Departures from

full employment among regions are generally an issue of central concern

in regional analysis, but these departures are not consistent with

the neoclassical assumption that factor inputs be fully utilized.

This is particularly important in Puerto Rico where the unemployment

rate has never registered less than 10 percent. An additional problem

in the neoclassical models is the difficulty with which uncertainty

can be admitted, and the explicit consideration of uncertainty is a

central issue in Puerto Rico.

Finally, the neoclassical approach assumes a world of perfect

competition, along with its correspondingly perfect information flows,

marginal adjustment of production, and relatively easy entry to and

exit from production. These assumptions are far from realistic in

Puerto Rico, particularly in the island's irrigated agricultural

sector. To date, this sector has been operated as a government











monopoly which has been so unresponsive to prices that it continues

producing sugarcane, even though the income earned barely covers

50 percent of the production cost. The entry to production of non-

sugar crops is proving to be extremely difficult due to innumerable

institutional and physical problems such as government policy, credit

availability, land tenure, lack of local experience in non-sugar

crops, etc.


Simulation Models

Simulation techniques may be utilized to incorporate a variety

of relationships within a single model. These relationships are

expressed as a system of equations (often nonlinear) obtained through

the application of other analytical techniques such as regression

analysis, etc. These relationships may be combined in the simulation

model to create a system of interacting relationships and feedbacks,

the response of which may be simulated over time.

The organization of information and relationships within the

simulation model may follow definite theoretical patterns, such as

the energy analysis framework developed by Odum (1971) based on

modeling patterns of energy flow. Others have used a less rigorously

organized approach in which the modeler devises causal relationships

not necessarily following a specific theoretical pattern, such as

the models of system dynamics (Forrester, 1968). This latter class

of simulation models also includes the combination of selected

parameters for the purpose of forecasting, such as the model of the

Susquehanna River Basin by Hamilton et al. (1969). Undoubtedly the












best-known utilization of simulation models has been the formulation

of various world models (Meadows et al., 1974; Mesarovic and Pestel,

1974). Simulation studies have also been used frequently in eco-

logical studies, as summarized by Patten (1971).

Perhaps one of the more severe problems with simulation tech-

niques lies in the ease with which a relatively simple model can be

expanded into increasing size and complexity, exploiting the confusion

between complexity and accuracy. The outcome of even complex socio-

economic models generally rests on only a few critical assumptions,

and by changing these basic assumptions the behavior of the model may

be completely altered. Thus, complex socioeconomic models have the

ability to obscure basic relationships with extraneous and essentially

nonfunctional detail.

Once the model is constructed and operational, if the output

does not appear to be "right," then its structure may be altered

until the "correct" results are produced. However, undue emphasis can

be placed on model manipulation without necessarily creating improved

understanding of the socioeconomic system being examined, as suggested

by Lee (1973, p. 168):

There is a popular illusion that confronting a computer
with one's ideas enforces rigor and discipline, thereby
encouraging the researcher to reject or clarify fuzzy
ideas. But in a more useful sense, the effect is the
opposite; it is all too easy to become immersed in the
trivial details of working with a problem on the computer,
rather than to think it through rationally. The effort
of making the computer understand is then taken for intel-
lectual activity and creative problem solving.











This criticism becomes increasingly valid as the complexity of the

model is increased. Nonetheless, the simulation methodology is

unique in its ability to incorporate within the framework of a single

model a variety of different relationships and techniques. A properly

constructed and applied simulation model is an excellent analytic

tool, perhaps unparalleled as a means to integrate complex systems.


Previous Resource Studies in Puerto Rico

This research examines Puerto Rico's post-war development

period, and particularly those patterns which have evolved in the 1970s.

Macroeconomic studies undertaken prior to the 1973 oil embargo tend

not to reflect the realization that development conditions are changing

in Puerto Rico. Thus, earlier studies reflect entirely different

conditions of economic performance and shed less light on the nature

of the difficulties the island faces in the 1970s. Historic patterns

of socioeconomic development have been examined in works such as

those of Lewis (1963), Ross (1966), and Curet-Cuevas (1976). Some of

the development patterns and problems which emerged in the 1970s were

documented and analyzed by the Committee to Study Puerto Rico's

Finances (1975) and the ComitO Interagencial (1975).

No study has been undertaken which directly addresses the

problem of resource policy and its relationship to the overall long-

range development process. A major social benefit-cost study of a

proposed copper mining project was undertaken (Logic, 1974), but the

social benefit-cost framework utilized was limited in scope and did

not address overall development issues in depth. A major water supply










study was conducted by the U.S. Army Corps of Engineers (1977) con-

currently with this research, but was focused primarily on defining

technical supply alternatives. The island's new agricultural plan

(Vicente-Chandler, 1978) addressed some facets of agricultural water

management, but this treatment was necessarily limited in scope.

The most comprehensive overall treatment of Puerto Rico's water

resource issues is contained in the 1973 and 1975 Water Resource

Assessments for Puerto Rico (Puerto Rico Department of Natural Re-

sources, 1974; Morris et al., 1977). Many of the findings reported

in this research stemmed directly from background studies prepared

for the latter of these assessments.

A considerable record of hydrologic data exists for Puerto

Rico and is available through a combination of local and federal

agencies. The U.S. Geological Survey is the most active agency on

the island with respect to water resources data collection and analy-

sis. The water resource characteristics of most portions of the

island as well as many problems of specific interest have been

studied and results published or made available in unpublished

form. Hydrologic conditions in south coast watersheds are described

in reports by Anderson (1977), Crooks et al. (1969), Dfaz (1974),

Giusti (1968, 1971), Grossman (1969), Heisel and Gonzalez (1976),

McClymonds (1971), and McClymonds and Dfaz (1972).

Geological Survey reports are augmented by the reports of

other government agencies and their consultants, plus the University

of Puerto Rico contribution which is promulgated primarily through the










Water Resources Research Institute in Mayaguez. The total number of

reports published in the past 20 years dealing with water supply in

Puerto Rico probably numbers over 100. Yet, despite the number of

publications related to water resource issues on the island, there

has been little focus on integrating the overall problem within the

framework of long-range development.


Study Methodology

Regional Development Model

This research begins with the construction of a regional

development model for Puerto Rico. This regional model has been

constructed in two basic sections focusing respectively on demographic

and economic parameters. Theoretical relationships for each parameter

are developed, quantified, and combined to create the composite model.

The simulation model is calibrated using data from the 1947-1977 period,

and is run until the year 2020.

In the demographic sector the population is divided into nine

age groups, with smaller age intervals being used for younger age

groups. Fertility and mortality rates are modeled as exogenous

variables, and net migration is modeled to be a function of the island

unemployment rate and the magnitude of income transfers.

The economic sector focuses on the role of capital as a

variable describing economic performance, recognizing that capital

is a quantifiable parameter which reflects a variety of other factors

such as entrepreneurship, level of economic organization, savings and










investment behavior, etc. Land, labor and resource availability are

examined as input variables describing economic performance in

Puerto Rico over the historic period.

Capital is divided into those stocks which are owned by

residents and by non-residents to examine the long-run effects of the

steadily increasing portion of productive capital which is externally

owned. Transfers from the federal government are shown to be an

increasingly important source of local income, but contribute neglig-

ibly to the formation of local productive investment. The relationship

between capital and production and the level of employment in the

modern sector of the economy are both determined by the capital-labor

ratio, an exogenous variable. Employment in the traditional agricul-

ture sector is assumed to decline steadily to a low but stable level.

The complete model, containing the demographic and economic

sections and their feedback via the net migration function, is simulated

using the DYNAMO II language (Pugh, 1973). Alternative values for the

foreign investment rate, the local investment rate, and the capital-

labor ratio are applied to generate four future scenarios. The results

of simulations to the year 2020 are examined to suggest those types

of policy which can generate more favorable patterns of regional

development.


Resource Management Model

Important resource management implications of changing regional

development policy are examined on the island's south coast. Water

demand conditions are described to ask what types of use patterns may










occur in the future. An income and cost model for sugarcane farms

is constructed to ask if a rational framework can be constructed for

evaluating irrigation demand in the sugar industry.

The hydrologic implications of increasing agricultural

consumptive use, increasing demand in the municipal and industrial

sectors, and different levels of artificial recharge are all examined

using an aggregate water and salt budget model for the south coastal

aquifers. This model is run over a 25-year period, with the objective

of describing the types of hydrologic changes which could accompany

significant increases in irrigation efficiency. Recommendations are

made for implementing institutional changes which can promote efficient

patterns of resource use, while avoiding deleterious effects to the

ground water system.


Report Organization

After the introductory comments in this chapter, the second

chapter describes the island of Puerto Rico and some of the problems

which have accompanied economic growth over the post-World War II

period. The south coast area and its hydrologic characteristics are

also described.

In the third chapter socioeconomic data from the 1947-1977

period are interpreted and the regional development model is

generated, showing the manner in which each model parameter is derived.

The results of calibration with historic data are summarized and

alternative future scenarios are described.










In Chapter IV, the water resource characteristics of the south

coast are examined, describing the level of water supply and demand

and the characteristics of current and potential future patterns of

water utilization. A simple water management model is constructed

to reflect the potential hydrologic effects of changed development

policies in the agricultural sector. The scenarios which are applied

to the water management model, as well as the results of simulating

each of these scenarios, are also described.

The management implications of these models are discussed in

Chapter V, showing the relationship between regional development

policy and water management in the agricultural sector. Existing

water management institutions are described, and recommendations are

made for changes in this institutional structure to accommodate a

changing regional development strategy.

Chapter VI briefly summarizes the conclusions and recom-

mendations stemming from this research.














CHAPTER II

STUDY AREA DESCRIPTION


Location

The island of Puerto Rico is the easternmost of the Greater

Antilles (Fig. 1). Puerto Rico consists of one main island, two

smaller inhabited islands, and several offshore cays, all having a

total area of 3,435 square miles (Pic6, 1969). The main island is

approximately 30 miles wide and 100 miles long. Being hilly or

mountainous throughout the interior, the majority of the population

and economic activity are supported on the narrow coastal alluvial

plains. The estimated 1977 population was 3.3 million. San Juan

is the capital city, and the San Juan metropolitan area has a popu-

lation of approximately one million.

The south coast study area (Fig. 2) consists of 14 municipali-

ties having a combined 1970 population of 448,000, of which 54 percent

were classified as urban. Ponce, the largest city in the study area

and the second largest city on the island, had a 1970 population of

133,000.

The study area contains the steep southern slopes of the

island's mountain range, a narrow band of foothills, and a relatively

broad alluvial plain which attains a width of four miles at its

broadest point. Because it falls in a rain shadow the south coastal

plains are semi-arid, receiving an average of 35 inches of rain

annually, concentrated in a fall wet season.
























































Fig. 1. Location map.





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Physical Setting

Geology

Puerto Rico was formed as a result of submarine volcanism

and uplifting which began approximately 120 million years ago in the

Cretaceous Period. Erosion and reef building during submergence

combined to form the coastal metamorphic and limestone deposits which

overlay the parent volcanic rock, which is exposed throughout the

interior (Beniroth, 1969). Limestone deposits exceeding 2,000 feet

in thickness occur near the coast and have developed karst landforms

including extensive sinkhole formation, haystack hills, and the absence

of surface drainage. Limestone formations outcrop primarily on the

western two-thirds of the island, and on the north coast these for-

mations have been developed as an important aquifer.

The island's maximum elevation is 4,389 feet above sea level,

and the entire island interior is characteristically hilly or mountain-

ous. Some 38 percent of the island's total land area has slopes

in excess of 45 degrees. Generalized topographic characteristics.are

summarized in Fig. 3 showing the extent of hill and mountain terrain

and the narrowness of the alluvial plains.


Vegetation and Land Use

The island has six life zones, which have been mapped by

Ewel and Whitmore (1973) using the method of Holdridge (1967). The

diversity of life zones reflects primarily differences in elevation

and exposure, giving rise to differences in temperature and rainfall.

The south coastal plain is located in the sub-tropical dry forest life

zone.

















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Due to intensive population pressures and an earlier dependence

on subsistence agriculture, which still exists in isolated locations

(Pool and Morris, 1976), the only areas of natural vegetation are

limited to the Luquillo National Forest and the Commonwealth forest

system, encompassing a total of 88,000 acres (4 percent of the island

area). However, considerable areas of marginal agricultural lands on

highland slopes have been abandoned and are reverting to secondary

forest.

Current land use in the south coast area is summarized in

Table 1. Agriculture accounts for the single largest category,

utilizing 51 percent of the land in the area; sugarcane is the

predominant crop. Of the 90,000 acres reportedly in sugarcane, at

least 50,000 acres receive irrigation on a regular basis.


Climate and Hydrology

Climate. Puerto Rico experiences an insular tropical trade-

wind climate. The average annual temperature in San Juan is 780 F,

and the record low is 61 F. Temperatures at higher elevations inland

are lower, and may fall below 50 F overnight in thewinter. Super-

imposed on the east-northeast trade winds is a land-sea breeze pattern

which results in easterly onshore winds during the daytime and

easterly offshore winds at night. There is a regular diurnal pattern

in wind speed on the south coast which varies from 3.5 mph at midnight

to 12 mph at noon, with wind velocities in the late summer and fall

being somewhat less than other seasons.












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Precipitation and surface water. Average annual rainfall is

70 inches per year island-wide, with a range from 30 to 200 inches per

year between the driest and wettest stations, respectively (Fig. 4).

Inasmuch as this variation is due to orographic effects, the mean

long-term runoff from watersheds may be predicted from elevational

data alone (Black and Veatch Engineers, 1971). As a result of the

impinging trade winds the north coast is characteristically moist,

whereas the south coast falls in a rain shadow. Patterns of rainfall

and pan evaporation on the north and south coasts are compared in

Fig. 5.

Rainfall records for the longest continually operating

stations on the island are graphed in Fig. 6 using a differential

mass diagram. Periods of above average rainfall appear as upward

sloping line segments and drought periods appear as downward sloping

segments, with the slope between any two points directly related

to the severity of the.departure from average rainfall. Although

relatively long-term variation is absent in the San Juan data, cyclic

patterns become evident in the data from the south coast stations,

with the past decade being generally drier than the period of record

on the south coast. The Ensenada station (GuAnica) is the driest

station on the island, receiving a mean annual precipitation of

29.5 inches.

On the south coast, a higher variation in rainfall occurs during

the drier first half of the calendar year than in the more moist second

half. In Fig. 7 the calendar year is divided into the first and second

















































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Fig. 5. Average rainfall and pan evaporation for the north and
south coastal climatic regions of Puerto Rico. Climatic
regions are defined by the U.S. Weather Service.
Source: National Climatic Center. 1973. Monthly averages
of temperature and precipitation for state climatic
divisions, 1941-70: Puerto Rico and Virgin Islands.
Asheville, North Carolina.









60 1



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1960


1980


Fig. 6. Differential mass diagram of annual precipitation for those
stations in Puerto Rico having the longest continuous
rainfall records. Ensenada is the driest station on the
island. Average rainfall over the periods of record are: En-
senada, 29.60 inches; Aguirre, 40.94 inches; San Juan (city),
60.17 inches. Data for Aguirre are incomplete for 1970 and
are not plotted.


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Precipitation as Percentage of Mean





Fig. 7. Cumulative probability of rainfall in the first and second
halves of the calendar year as a function of the mean
rainfall for that same six-month period, south coast of
Puerto Rico (Villalba station).










half and the cumulative probability of rainfall is compared with

respect to the mean of record for each six-month period. The most

severe drought conditions on the south coast occur during the summer,

following low rainfall in the spring.

The island's highly dissected mountainous interior gives

rise to numerous small streams characterized by small tributary

watersheds, steep slopes, and short length prior to reaching the

ocean. There are 26 "major" stream basins on the island, but only

seven have watersheds greater than 100 square miles. The largest

watershed is the Rfo Loiza which covers 310 square miles.

Streams on the south coast are small and none flow throughout

their reach over the entire year. The upper stream reaches generally

maintain a year-round streamflow, but in most seasons diversions for

irrigation plus percolation into the aquifer deplete this streamflow

as soon as it reaches the alluvium.

Water supply development. Unregulated stream diversions

represented the primary source of irrigation water on the south coast

until the latter portion of the 19th century, at which time centrifugal

pumps were installed on some farms. The American occupation of the

island brought with it an influx of investment capital. Mainland

corporations plus wealthier local families undertook large-scale

irrigation on sugar plantations and supported the implementation of

large-scale public irrigation works. The South Coast Irrigation

District was operational by the First World War, providing both irri-

gation and hydropower supplies.










The history of reservoir construction on the island is sum-

marized in Table 2. Of the 25 reservoirs constructed in Puerto Rico

to date, 68 percent have had power generation facilities, 48 percent

supply water for irrigation, and 40 percent include a domestic supply

component in their design. Two additional reservoirs are being

constructed in Ponce for combined flood control and water supply bene-

fits of 37,000 acre feet/year, but will not enter service until the

mid-1980s. Only one south coast reservoir, Toa Vaca, has municipal

water supply as its primary function; all others have been developed

primarily for irrigation supply.

The South Coast Irrigation District consists of three inde-

pendent reservoirs and canal systems, supplying an average of 70,000

acre feet/year to approximately 28,000 acres. The District has seen a

gradual deterioration in service over the decades due to the combina-

tion of reservoir sedimentation, deterioration of canal sections,

possible land use changes, and possible changes in the water management

effectiveness of both the supplying agency as well as the users.

The Southwest Puerto Rico Project supplies an average of

35,000 acre feet/year of irrigation water to 22,000 acres in the Lajas

Valley. This system entered operation in 1954, and consists of five

interconnected reservoirs and stream diversions, two power-generating

stations, a concrete-lined irrigation canal, and a drainage system.

Ground water. Aquifer areas in Puerto Rico are outlined in

Fig. 8. The development of limestone formations predominates on the

north coast west of San Juan, whereas ground water development on the
































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south coast has occurred in the alluvial water table aquifer. Both

formations are prolific aquifers, and individual wells with yields

of 2,000 gpm or more may be developed. Throughout the island interior,

water-yielding zones of fracture in volcanic formations have been

developed for ground water supply, but these wells are generally for

domestic use and capacities are characteristically limited to 5-20

gallons per minute.

The south coastal alluvium lying east of Ponce is the most

copious aquifer in Puerto Rico, sustaining an annual withdrawal

of approximately 200,000 acre feet per year. This alluvium consists

of a loose agglomeration of interbedded and interfingering sedimentary

materials, ranging from silts to cobbles. Alluvial formations are

continuous from Ponce eastward to Guayama, but to the west of Ponce

are confined to individual river valleys. The alluvium has a maximum

depth of approximately 250 feet, and is generally underlain by limestone

formations containing ground water of high mineral content. These

limestone formations outcrop as foothills along the entire south coast,

and westward from Ponce they extend to the ocean and form hills which

separate the alluvial valleys. The south coast soils are derived from

a mixture of volcanic and limestone parent materials and are generally

neutral to basic in pH.

Limestone formations underlying the south coast alluvium have

not been developed for water supply on a significant scale. Shallow

penetration of this aquifer in the Yauco Valley has yielded water of

suitable quality (personal communication, Lee Eaves, Manager, Carib-

bean Well and Pump Service, Ponce, Puerto Rico, 1977) and limestone










formations have been tapped for water supply in the upper reaches of

the alluvium inland from Ponce (McClymonds, 1971). However, the

water from these formations is generally of inferior quality and is

infrequently utilized.

Limited areas of saline intrusion occur along the coast, but

in most locations it is not yet a serious problem. The most extensive

area of intrusion has occurred beneath the City of San Juan, and

intrusion of salts into wells in several other locations has occurred

when depression cones intercepted saline wedges lying in the lower

reaches of rivers. There is a system of wells on the south coast for

monitoring water level and intrusion, but similar information for the

north coast is lacking (Dfaz, 1974).


Socioeconomic Setting
History

Puerto Rico was discovered by Columbus on his second voyage

and was settled by Ponce de Le6n during the first decade of the

sixteenth century. Under Spanish rule San Juan and the island of

Puerto Rico played a military and economic role secondary to both

Santo Domingo and Havana, more important Spanish cities in the

Caribbean. Nevertheless, considerable expense was undertaken by

Spain to fortify the entrance to San Juan Harbor in order to provide

refuge for Spanish treasure ships and to maintain control of the

strategic port.

Under Spanish rule Puerto Rico's political and economic

development lagged. For example, in 1898, the salary of the Spanish










Governor was greater than island-wide expenditures for education on

the island's 950,000 inhabitants (Lewis, 1963).. In the late nineteenth

century,efforts to break free of Spanish domination appeared to be

bearing fruit. However, by 1898 the island was still not politically

autonomous and the Governor was still appointed by the Spanish Crown.

When Cuba revolted against Spain precipitating the Spanish-American

War, Puerto Rico did not follow suit.

In 1898 Puerto Rico became a territory of the United States

as part of the spoils of the war with Spain. Following annexation

the Governor was appointed by the U.S. President, and it was not until

1947 that the Governor was elected locally.

Heavy investment in the sugar industry by mainland corpora-

tions rapidly followed annexation, resulting in dramatic changes on

the island. A diversified but undercapitalized agricultural system

was bought out by monied American interests and converted to the

lucrative sugar export business (Fig. 9). Due to the abundance

of labor, unemployment and underemployment was the rule and wages were

maintained at poverty levels. Unlike other countries in Latin America

where additional lands were available for the development of sub-

sistence agriculture further inland, on insular and heavily populated

Puerto Rico this alternative was highly restricted. The worker was

effectively tied to the land holdings of the sugar and coffee landlords

who needed labor only seasonally (Ross, 1966). As a result of competi-

tion for limited land resources, smaller and less competitive units

were gradually absorbed by more efficient and better capitalized farms




















1.5






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820 840 860 80 1900 1920 1940 196 1
0 0 o 0 9.

















Year





Fig. 9. Annual production of raw sugar in Puerto Rico.
Source: Puerto Rico Dept. of Agriculture, San Juan.
Source: Puerto Rico Dept. of Agriculture, San Juan.










(Mintz, 1972a), similar to the land tenure trend documented in other

land-limited agrarian economies (Sansom, 1970).

The 1920s and 1930s had seen a steady decline in the plight

of the Puerto Rican worker. The hurricanes of 1928 and 1932 virtually

destroyed coffee plantations and the tobacco crops. As an indicator

of the degraded economic conditions, Ross (1966) noted that in the

early 1930s not more than 2,000 families on the island had sufficient

income to pay taxes, yet 39,000 were employed as domestic servants

(7.5 percent of the labor force). Home needlework was estimated to

employ over 30,000, or approximately 30 percent of those engaged in

the "manufacturing" trades. In agriculture the 500-acre rule was not

enforced, and an estimated 20 percent of all agricultural land in

Puerto Rico was held in violation of it, primarily by the sugar com-

panies.

The 1940s were a period of profound economic as well as

political change on the island. Although the results of these changes

were not visible during that decade, the fundamental political and

economic directions which evolved during that period have remained

largely unchanged to the present. In the 1940s work was begun in

earnest to change the political status of Puerto Rico, beginning with

the election of the Governor locally and eventually resulting in the

formation of the Commonwealth status (Estado Libre Asociado) in 1952.

The mid-1940s, under the term of appointed Governor Maxwell Tugwell,


1U.S. Congressional Joint Resolution 20 of 1900 established
federal policy that no individual or corporation in Puerto Rico should
own over 500 acres. (Rivera-Rfos, 1978)










also saw the organization of the executive branch of the Puerto Rican

Government as it is known today. The year 1947 also marked the

beginning of reliable economic data, which was compiled by the then

new Planning Board; and in this same period the industrial development

agency, Fomento, was also created.

With limited agricultural land and high population density it

was realized that an economic system based on agriculture alone could

not be responsible for generating the income necessary to bring the

island's population out of poverty. The late 1940s saw the beginning

to the end of this poverty as a result of three factors: (1) the

attraction of mainland manufacturing investment through an industrial

incentive program known as "Operation Bootstrap," (2) the massive

migration of Puerto Ricans to the New York area which stabilized the

size of the island's labor force, and (3) the growth of transfer pay-

ments from the federal government. Taken together, these three

factors created the fundamental changes in the Puerto Rican system

which now provides adequate food, shelter and medical services for the

entire population, plus a modest measure of luxury for many.


Socioeconomic Objectives

The initial development process reflected movement toward

the obvious and primary goal of escaping from pervasive poverty.

However, as progress toward the abolishment of extreme poverty began

to be realized, a more definitive statement of social goals was

developed, as quoted below from the "Message of the State of










the Country," delivered by Governor Muioz Marfn to the Legislature

in 1964:1

I point out six things that I judge fundamental to the pur-
pose of our people, and on which we will invest a good
portion of the continued increases of our economic assets:

Education for all in quantity, quality and depth,

Maximum health with substantial equality for all
with respect to quality of service,

Approximate balance of quality of life between rural
and urban population, development of cities in an
orderly form,

Home ownership for all families,

That a growing portion of the growing Puerto Rican
economy, and consequently of the decisions of its
private sector, be in the hands of the sons and
daughters of this country as has been the case in
all the presently developed countries of the world,

Abolition of extreme poverty.

These enumerated goals are the desired final products of the

island's socioeconomic development process. The pursuit of increasing

income through industrialization and economic growth has been pursued

with intensity, yet has created patterns of growth which are not

entirely compatible with achievement of the stated goals. That dilemma

is examined in this study.


Socioeconomic Conditions

Economic characteristics. Although the island is poorer than

the lowest income state, in comparison to neighboring countries in

the Caribbean and Latin America, it has gained considerable wealth.


1Diario de Sesiones, Cuarta Sesi6n Conjunta, 11 February 1964,
p. 5. Author's translation.










During the periodfollowing World War II the island enjoyed a special

set of circumstances which combined to produce a period of rapid

economic growth, industrialization and social change. The input of

industrial capital from the mainland seeking to utilize the island's

cheap labor supply, its access to U.S. markets, and exemption from

both local and federal corporate income taxes, created a period of

rapid industrial expansion starting in the late 1940s and continuing

into the early 1970s.

The initial success of the island's development program was

based less on clever design or able implementation than on the island's

relationship with the United States. Not only has the mainland infused

capital, entrepreneurship and transfer payments into the island on a

large scale, but it also absorbed the massive exodus of Puerto Ricans

from the island during the 1950s.

However, the conditions which combined to create the oppor-

tunity for rapid economic growth and stable levels of unemployment

have proven to be transient. The post-war growth began to falter and

in the early 1970s conditions began to depart recognizably from the

patterns of previous decades. Rising wage levels on the island

helped stem the migration of labor to the mainland while simultaneously

making the island less desirable for labor-intensive industries. New

industries locating on the island became steadily more capital-

intensive, obtaining the benefits of tax exemption but oriented less

toward the employment of the increasingly costly labor force. Infra-

structure requirements and the discharge of pollutants have increased










as a function of capital intensity thereby increasing both monetary

and non-monetary costs of providing each additional job.

Despite intensive industrialization, the island's unemployment

problem has not been resolved. The unemployment rate has never

dropped below 10 percent over the entire development period, and in

1977 it averaged 20 percent, the highest value recorded over the

entire post-war period. The island's increasing income has not been

used to generate a stream of savings and productive local investment,

but rather has been used to support an increasing burden of debt.

The Commonwealth Government has relied increasingly on

federal aid programs as a source of income and employment. By 1977

the value of unilateral transfer payments from the U.S. equaled

26 percent of the island GNP, and transfers to individuals accounted

for 28 percent of personal income (Puerto Rico Planning Board, 1978a,

1978c).1 The implementation of the federal food stamp program in

Puerto Rico has been the greatest single contributor to increased

transfer payments during the 1970s, and over 60 percent of the island

population now participate in this program.

The income level on the south coast is lower than the island

average, and the trend has been for this gap to increase slowly.

A variety of socioeconomic parameters for south coast municipalities

are summarized in Table 3.


1Socioeconomic accounts data, hereinafter not accompanied by
a citation, shall be understood to be contained in the economic
accounts of Puerto Rico (Puerto Rico Planning Board, 1978a, 1978c) or
of the United States (Economic Report of the President, 1978).













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Demographic characteristics. Puerto Rico experienced a

classic demographic transition in terms of changing fertility and

mortality rates. However, migration to the mainland converted the

demographic transition period from one of rapid population growth

to one of population stagnation. Conversely, the post-transition

period which the island has already entered has been characterized

by high rates of population growth. This demographic anomaly,

created by migration, is of primary importance in explaining the

dramatic economic changes which have occurred in Puerto Rico over

the post-war period.

The migration from the island, primarily to the New York area,

was so large that it actually resulted in two consecutive years of

decreasing population on the island in 1953 and 1954, despite high

fertility. More importantly, the major portion of these emigrants

were young and just entering the labor force (Friedlander, 1965). As

a result of migration the population of Puerto Ricans living on the

mainland U.S. increased from an estimated 100,000 in 1947 to

1.5 million in 1974, representing the exportation of 400,000 or more

labor-force members over that 27-year period.1 Over that same period

the island economy never saw an unemployment rate under 10 percent

and generated a net increase of only 203,000 jobs, despite strong

industrial promotion activities.

As economic conditions on the island began to show improve-

ment in the 1960s, the pace of net emigration slowed. This flow has


1Data provided by the Puerto Rico Planning Board, Division of
Demographic Statistics, 1976.










now reversed, and during the 1970s Puerto Rico has experienced net

immigration, despite a local unemployment in excess of 15 percent.

It is possible that a significant portion of this immigration which

occurred, despite poor employment opportunities, can be attributed

to the growth in welfare benefits on the island.


Institutional Framework

Commonwealth Government institutions characteristically have

a broad and strong legal mandate for resource planning and management

action, and public policy is the most important single factor

influencing patterns of resource utilization on the island. The

government supplies all municipal water and most irrigation water

island-wide. Through the Puerto Rico Sugar Corporation the government

operates approximately 90 percent of the island's irrigated farm land,

and the Puerto Rico Land Authority is the largest owner of irrigated

lands. Government agencies supply a significant portion of the

industrial water used on the island and regulate the withdrawals by

those other industries which are self-supplied. The pattern and

location of industrial development, and its corresponding water demand,

is determined through the zoning powers of the Puerto Rico Planning

Board.

Despite these large resource management responsibilities, a

coherent strategy for water resource development has not emerged,

aside from the protection of existing beneficial uses which is required

by law. During the past decade the island's resource management

problems and conflicts have grown in severity while satisfactory










solutions have become increasingly difficult to define and implement.

Resource development decisions have been made based on poor analysis,

or even by default (Margalin and Campen, 1970).

Two pieces of legislation are of particular importance in

establishing the legal framework for environmental resource management

on the island. The Public Policy Environmental Act1 promulgated public

environmental policy and established the Environmental Quality Board

(EQB) as a watchdog agency. Section 4 of this law provides that all

agencies of the government shall use an interdisciplinary system of

study in analyzing environmental problems, guaranteeing the integrated

use of natural and social sciences.

The Law for Conservation, Development and Use of the Water

Resources of Puerto Rico2 establishes that all fresh and coastal waters

within the jurisdiction of Puerto Rico are the wealth and property of

the People, including all water both above and below ground. All

waters fall under the administrative jurisdiction of the Commonwealth

Government as represented by the Secretary of Natural Resources, who

is provided broad planning and management powers and responsibilities.

The water law provides that planning and management actions shall be

based on socioeconomic benefit-cost analysis, with the objective of

enhancing the well-being, economic development and public safety of

the island, and that all analysis shall be based on an interpretation


1Law No. 9, July 1, 1970, Legislative Assembly of the Common-
wealth of Puerto Rico.
2Law No.136, June 3, 1976, Legislative Assembly of the Common-
wealth of Puerto Rico.










of the role of the proposed management alternatives with respect to

the overall hydrologic cycle and its effects on natural systems.

Water resource planning and management responsibilities are

fragmented among numerous Commonwealth agencies, with the result that

no single agency may be said to play a lead role. The principal

agencies involved and their primary areas of responsibility are sum-

marized below.

The Puerto Rico Planning Board is the ultimate planning

authority in the Commonwealth Government and establishes overall

planning guidelines which are to be followed by the other agencies.

The primary resource management functions of the Planning Board, an

Executive Branch agency, include the continual updating and implemen-

tation of the master land-use plan, which includes decision making

over the future location of industrial sites and other intensive

resource users. In addition, the Board is responsible for the co-

ordination of the plans of other government agencies.

The Puerto Rico Aqueduct and Sewer Authority (PRASA), a public

corporation, is responsible for the planning, construction and main-

tenance of all municipal water supply and wastewater collection and

treatment facilities on the island. Of the total population of

3.1 million in 1975, an estimated 2.6 million persons were served by

the Authority (house connections plus public fountains). Of the total

1975 withdrawals of 306 mgd, metered deliveries were 199 mgd, or an

island-wide average of 77 gallons per capital per day. Approximately

30 percent of all withdrawals do not appear as metered deliveries, but










are lost due to in-plant uses by PRASA plus pipe exfiltration, fire-

fighting, and clandestine use. The Authority is responsible for the

operation and maintenance of several water supply reservoirs, includ-

ing the Toa Vaca reservoir on the south coast.

The Environmental Quality Board (EQB) is the local counterpart

of the Environmental Protection Agency and is responsible for the

promulgation and enforcement of environmental quality standards. The

EQB has established water quality standards for both fresh and ocean

waters, and has programs to improve environmental quality through the

reduction of point sources of water, air and noise pollution. It is

responsible for the conduct of the 208 water quality programs on the

island and wastewater facility planning.

The Puerto Rico Water Resource Authority (PRWRA) is a public

corporation which maintains and operates the electric power generation

facilities island-wide. In addition, the Authority owns and operates

the three government irrigation systems on the island, two of which

are in the south coast area. An average of 100,000 acre feet/year is

supplied to approximately 50,000 acres lying within the South Coast

and Lajas Valley Irrigation Districts. The third district is on the

moist north coast, where only 600 acres are currently under irrigation.

The Authority also operates reservoirs having hydropower facilities,

but less than one percent of the island's total electric supply is

derived from hydropower.

The Department of Natural Resources is the newest of the

Commonwealth agencies, having been organized in 1973. Under the









provisions of the 1976 water law, the Department is required to inven-

tory all water uses and wells island-wide, establish a system of

water use permits, regulate ground water drilling and withdrawals,

and prepare a water plan which will incorporate socioeconomic cost

benefit analysis. Of all the government entities in Puerto Rico,

the Department has the broadest water resource responsibilities, but

to date the role played by this Department has been minor. The

failure of the Department to fulfill its obligatory functions, as

provided in the water law, has been the subject of recent litigation.1

Additional Commonwealth and Federal agencies are involved in
water resource planning and management on the island, with the number

of agencies having significant roles totaling at least 16.


1Mision Industrial de Puerto Rico vs. Fred Soltero Harrington,
Secretary of Natural Resources. Superior Court of Puerto Rico, 23-
23 August 1978, San Juan. As of this writing this case had not yet
been decided.















CHAPTER III

REGIONAL MODEL

The regional model for the island of Puerto Rico is formulated

in this chapter. It has been constructed as two sub-models of

population and economic performance which are linked through two

relationships: (1) the population and its age distribution determines

the size of the labor force, and (2) economic performance and labor

force variables together determine unemployment, which influences

migration. This model is summarized in Fig. 10, using the symbols

defined in Fig. 11.

In this chapter the model structure is described, historic

relationships are synthesized, and the model is calibrated using data

for the 1947-1977 period. The assumptions for projecting modeled

relationships to the year 2020 are also outlined.

The primary purpose of this model is to examine alternative

levels of future economic performance given different assumptions

concerning the rate and source of future capital formation and the

capital intensity of production. Although the population model

remains unchanged for all scenarios, different patterns of population

growth are produced in each scenario due to the effect of different

unemployment levels on the rate and direction of migration.









Fig. 10. Regional model for Puerto Rico in the DYNAMO language.
See Fig. 11 for explanation of symbols.

Legend:

iPt = Population of age group "i"

dt = Crude death rate

bt = Crude birth rate

Ut = Unemployment rate in Puerto Rico (percentage)

Pt = Population of working age in Puerto Rico

P" = Labor force in Puerto Rico

qt = Labor force participation rate
Lt = Capital-labor ratio for Puerto Rico

Yt = Gross National Product of Puerto Rico (1954 dollars)

Ht = Remission of business profits abroad (1954 dollars)

aKt = Locally owned capital stocks (1954 dollars)

bKt = Externally owned capital stocks (1954 dollars)

cKt = Stock of consumer assets
Ak = Depreciation rate of capital stocks

Ac = Depreciation rate for consumer assets

Et = Total employment in Puerto Rico

E' = Employment in the traditional agricultural sector

Ft = Rate of external capital investment (1954 dollars)

St = Rate of savings and investment in the local economy

Gt = Transfer payments per capital (1954 dollars)














-W-~


I


-\' I


--


'I














SSource or sink of conserved material

D State variable defining the storage level of a

conserved material


Equation controlling the flow rate of a

conserved material


} Exogenously specified variable


SAuxiliary equation which is computed but has

no material flow associated with it


-- Causal linkage without material flow


Flow of conserved material






Fig. 11. Description of symbols used in the regional model in
Fig. 10.










Population Sub-Model
General Equations

Pressat (1972) has described the growth of a closed population

by


t+At = Pt + Bt,t+At t,t+At (3-1)

By adding a term for net immigration the complete population equation

may be obtained:


t tP +B- D + M (3-2)
Pt+At P tt+t + t+ t,t+At + t,t+At (3-2

where


P = population

B = births over interval t,t+At

D = deaths over interval t,t+At

M = net immigration over interval t,t+At

t = time, and

At = time step

The rate of births, deaths and immigration may be defined as

Bt
b .
b Pt (3-3)

Dt
t Pt (3-4)

Mt
mt = (3-5)











where


b = crude birth rate

d = crude death rate

m = net immigration rate


The population equation may then be written in its simulation form:


Pt+t = P + At P (bt dt+ mt)

= Pt [1 + At (bt dt + mt)] (3-6)


The age structure of the population may be generated by using a

separate equation for each age group, adding rate equations to express

the transfer of population sequentially from younger to older age

groups as a result of aging.

The population of Puerto Rico has been divided into nine age

groups, with the population from 0-19 years being broken into 5-year

classes and the remaining population being broken into 10-year

intervals. Smaller age classes have been applied to the younger age

groups because the model is more sensitive to their behavior. Mor-

tality occurs in all age groups, but is so small that it may be

neglected for all ages except infants and the population over 40 years.

Similarly, births are neglected in all but the 15-39 year groups.

The crude rate of fertility, mortality, and migration

(bt, dt, mt) are converted to the age specific rate for each age

group (ibt, idt, imt) by multiplying by the age specific coefficients

shown in Table 4. Thus














Table 4. Age Specific Coefficients for Population Equations.


Age Specific Coefficients
Births Deaths Migration
icb icd icm

0 0.2 0.1

0 0 0.1

0 0 0

1.8 0 0.25, 0.10a

4.0 0 0.45, 0.30a

1.7 0 0.1

0 0.4 0

0 1.5 0

0 8.5 0, 0.25a


Aging Coefficients

ix iY

0 0.2

0.2 0.2

0.2 0.2

0.2 0.2

0.2 0.0

0.1 0.1

0.1 0.1

0.1 0.1

0.1 0


aMigration coefficients
second value in 1967.


were shifted from the first to the


Age Group

i Years

1 0-4

2 5-9

3 10-14

4 15-20

5 20-29

6 30-39

7 40-49

3 50-59

9 60+


I I- 1` 11-~1 1 I--- ~- -- IYI--~-""-- I


-----












ibt = iCb bt


idt icd dt

imt = iCm mt

where


icb = age specific coefficient for birth rate

icd = age specific coefficient for death rate, and
icm = age specific coefficient for net migration rate


The population of all nine age groups may be described using two basic

equations. The equation for the youngest age group is


1Pt+l = 1Pt + At( bt iPt- d dt 1Pt

+ Icm mt Pt 1Y'Pt) (3-7)


The population of all other age groups is given by


iPt+l = it + t(ix i-1Pt + i m mt iPt

icd dt iPt- y P t) (3-8)


In these equations the coefficients ix and iy show respectively the

gain and loss of population by each age group as a result of aging.

Fertility
One of the most marked social effects of industrialization and

increasing incomes is that of initiating the demographic transition,












characterized by a rapid decrease in mortality and the retarded

decrease in fertility, as summarized in Table 5. These changes are

attributable to the changes in both the level and sources of income

which occur as a result of industrialization and urbanization.



Table 5. Characteristics of the Demographic Transition.


State Population
of Industrialization Fertility Mortality Growth Rate

Nil High High Low
Developing High Decreasing High
Advanced Low Low Low


Source: Heer, 1972.



Decreases in fertility and mortality in the pattern of the

demographic transition have accompanied industrialization in Puerto

Rico, as shown in Fig. 12. Weller (1968) studied changing fertility

patterns in Puerto Rico and concluded that the changing employment

role of the woman outside of the house was a significant factor in

reducing fertility. Friedlander (1965) correlated the educational level

of Puerto Rican women to number of children (Table 6). Myers and

Morris (1966) analyzed fertility reduction in Puerto Rico as a

function of the rural-to-urban migration and determined that the

fertility of mobile women was significantly lower than for those who

had not migrated to the San Juan metropolitan area.























2-5 -


4


I~


Population Growth Rate


~-Jii(b)
-l
A


0
-I


Year


Fig. 12. Historic trends in selected demographic parameters for Puerto
Rico. (a) Estimated annual population at mid-year; (b) An-
nual percentage rate of population increase or decrease;
(c) Annual rates/1,000 inhabitants for crude fertility,
crude mortality, and net migration.
Source: Puerto Rico Health Department (n.d.).


Population __


-


'5












Table 6. Educational Level Achieved vs. Com-
pleted Fertility for Puerto Rican
Women.


Mother's Education Number of Children

None 6.1

1-2 years 5.0

3-5 years 4.0

6-8 years 3.4

High school 2.4


Source: Friedlander, 1965.



These and numerous other studies have emphasized that the

framework within which fertility decisions are made is complex. The

child is a non-market good, making it often difficult to analyze

fertility on the basis of economic parameters alone. The cost of

children is a function of the opportunities which the parents must

forego as a result of child-bearing. Family size may change in

response to the changing tastes of the parents for leisure time,

travel, economic goods, etc. The relative cost of children also in-

creases as the family moves from a traditional agrarian setting to

the city. Factors which tend to reduce fertility in the urban-

industrialized setting include: (1) increased cost of living space,

(2) the higher cost of goods in the market system, (3) lack of un-

skilled jobs for child employment such as are available in the

traditional agrarian setting, (4) compulsory school attendance,


_ _I__ __ __ __~











reducing again the child's working ability, (5) availability of

improved pension systems in old age, and (6) changing values, tech-

niques and information on contraception and abortion (Easterlin,

1971; Schultz, 1973; Willis, 1973).

Despite the apparent complexity of fertility decisions, income

and fertility decline are strongly correlated over the post-war

development period in Puerto Rico (Fig. 13). This suggests that in-

come changes may be used as a surrogate for the variety of socioeconomic

changes which characteristically occur during development and which

create the demographic transition. Inasmuch as changing income

levels are perhaps the best overall measure of the development process

(Meier, 1970), this good correlation between increasing income and

decreasing fertility rates during the initial development period is

expected.

However, as higher income levels are achieved the relation-

ship between fertility and income becomes increasingly ambiguous,

and nonmonetary factors play a larger role in the determination of

demographic characteristics. Freedman and Coombs (1966) and Willis

(1973) have noted that there is only weak correlation between income

and family size in the United States. Sweezy (1971) has noted that

fertility rates changed imperceptibly in the United States between

the four years preceding the Depression (1925-1929) and the subsequent

four most severe years of the Depression, indicating the lack of

short-term fertility response to income changes. Long-run income and

fertility trends in the United States are summarized in Fig. 14,

showing the uncertainty of this relationship in an industrialized












50
S r-1947
'* b 44.42 0.0205 Z
40 I. s \ (,2=0.96)

| I94 ^ *- -1
3


-o 130


20 -
"-.._ 20 -'-- '--------------'-


200 300 400 500 600 700 800 900 1000 110C

S Personal Consumption Expenditures Per Capita (1954 dollars)


Fig. 13. Fertility (b) as a function of personal consumption expendi-
tures (z, used as a proxy for income) in Puerto Rico.
Data sources: Puerto Rico Health Department (n.d.) and
Puerto Rico Planning Board (1978c).


40


0


30i Crude Birth R te


o o

S20 .pO0

"--^ f -

SGNP per Copito-- -


1880 1900 !920 1940 1960


Jo
1980


Year

Fig. 14. Comparison of the crude birth rate and gross national
product per capital (in 1929 dollars) for the United
States, showing the uncertain relationship between
income and fertility.


Cd

5-
Cd
*0
0,
5-


_~_~_










economy. Once the demographic transition is essentially completed,

social factors only poorly related to economic performance appear to

dominate fertility decisions.

A sigmoid curve is hypothesized to be most adequate for

describing the overall long-run fertility reduction process (Coale,

1974), and has been fitted to Puerto Rican fertility data in Fig. 15.

The crude birth rate in Puerto Rico is modeled to stabilize at 15

births per 1,000 of total population, which is approximately the

birth rate required to maintain a stable population. The fitted

equation is


27
bt :1 + e0.123(T- 1965) + 15 (3-9)


where


T = year


A sigmoid curve was used by Lotka (1924) to predict the long-term

population growth of the United States. However, Lotka's predicted

population levels were in error due to the unforseeable post-war

baby boom.


Mortality

The crude mortality rate in Puerto Rico declined rapidly

during the late 1940s and early 1950s and soon stabilized at the

level at which it remains today. A rapid decrease in mortality is

characteristically obtained in the early stages of a development





62










S-

4-
14-


4-)



0



O O,



10 40












4--
~ o -
0






















a)
-C
0
r r / *L-
S4-








S0 -*
,.. -




.r- a)



0 0
r~- .I-










0 oo.0 0 ,r




(UO.I Lndod [P .o 40 000' L/Sfqq QA.L)

a2~J q:iL apn. 3 -
U -
S-
/~S (3j cEa)



4J 4-0

t o 4- 4-)




V I- 4- CM




I 2 !=-f- .











a^By q~jig apruo '










process due to the effectiveness of public health services. However,

once these basic services are provided, further increases in income

have little effect on mortality. Although the age-specific mortality

may remain constant, the crude death rate will slowly increase as the

population distribution ages. The crude mortality rate in Puerto

Rico (Fig. 16) has been modeled to decline in a linear fashion and

then to stabilize according to the following relationship:


d947-1953 = 1402.7 (5/7)T (3-10)

d1954-2020 = 7.0 (3-11)

The age specific mortality rate has been defined as a fixed multiple

of the crude mortality rate. Because changes in the mortality rate

will have little effect on the model, the use of a more elaborate

mortality function is unwarranted.


Migration

Neoclassical theory predicts the migration of population from

areas of low income and high unemployment to areas of higher income

and lower unemployment, a trend which would tend to generate equilib-

rium levels of unemployment and income nationwide. However, the real

world represents a marked departure from this model and strong

differences in income and unemployment levels persist, including

enclaves of traditionally low income such as Appalachia. Richardson

(1973) reviewed inter-regional migration models, pointing out that

differences in levels of unemployment appeared to be the most




























1011




9o





I)
cL


i960
Y AR


Fig. 16. Crude mortality rate in Puerto Rico.










significant single variable explaining migration, as predicted by

neoclassical theory. However, the characteristically poor statisti-

cal fit achieved by these models indicated that other factors played

an equally important role.

At least four parameters in addition to simple differentials

in income and unemployment need be considered to explain migration

patterns among regions (Isard, 1975; Richardson, 1973). These may

be summarized as:

1. Monetary cost of moving

2. Psychic cost of leaving family, friends and

familiar surroundings

3. Changes in non-monetary income due to differences

in culture or environmental factors such as climate

4. Uncertainty and the imperfect information on which

migration decisions are based

Some of these factors cannot be quantified, but do help to

explain some of the observed temporal and spatial patterns which have

characterized Puerto Rican migration. Although migration to the

mainland has been underway since the beginning of this century, these

factors combined to prevent large-scale migration until after the

Second World War (Mintz, 1972b). Important factors delaying migration

were the relatively high cost of the passage in relation to pre-war

earnings, and the time lag which was necessary for the initial

emigrants to establish themselves on the mainland to serve as a source

of information and assistance for potential migrants yet on the island.










By migrating from the island to the Puerto Rican neighborhoods

in the New York City area it was possible to minimize the migration

distance with respect to factors such as culture and language differ-

ences. The factor of uncertainty was reduced when family or friends

preceded the migrant and could assist in finding lodging and employment.

This attempt to minimize these migration costs or distances accounts

for the continuing clustering of Puerto Ricans in ethnic communities,

a pattern which suggests that the employment opportunities available to

migrants will be significantly different from the national average.

Migrants to the mainland in the 1950s were composed primarily

of younger persons (Friedlander, 1965), and the net return of migrants

appears to follow a similar pattern (Zell, 1973). It is estimated by

the Puerto Rico Planning Board (1978b) that 69 percent of the net

immigration to the island in 1975 was composed of return migrants, an

additional 18 percent was composed of Puerto Ricans born in the United

States (children of migrants), while the remaining 13 percent repre-

sented immigration from foreign countries. The concentration of

return migrants in the 14-29 year age groups has had a major effect

on the unemployment rate in that group, as summarized in Table 7.

It is not known to what extent this higher unemployment among return

migrants reflects the frictionall" effect of higher job mobility

among returnees or their difference in competitiveness in the local

job market. A portion of the unemployment may also reflect an employ-

ment strategy designed to maximize the receipt of unemployment and

other social welfare benefits (Zell, 1973).

















Table 7. Effect of Returned Puerto Rican Migrants on the Percentage
Rate of Unemployment in Puerto Rico, 1972.


Item

Total unemployment rate

Participation rate in
14-29 year group

Percentage of population
in San Juan area

Percentage of unemployment
in San Juan area

Percentage of island population,
excluding San Juan area

Percentage of island unemploy-
ment, excluding San Juan area


Returned Migrant

19.9%


71.6%


Non-migrant

10.1%


49.1%


15.9%


24.6%


23.8%


44.0%


Source: Zell, 1973.








Unacceptable results are obtained when the net migration

between Puerto Rico and the mainland is related to simple differences

in the rate of unemployment. The fitted linear equation is


m = 16.1 2.98 Ud (3-12)


where


m = net migration rate to Puerto Rico, positive values

denoting immigration (migrants per 1,000 of total

island population)

U = island unemployment rate (percentage)

Ud = difference between mainland and island unemployment
rate (percentage)


This equation yielded a correlation coefficient of only 0.37, reflect-

ing the highly scattered nature of the data (Fig. 17).

When the unemployment rate in Puerto Rico alone is substituted

for the unemployment differential a more consistent relationship is

obtained. Net migration may be modeled as a simple linear function of

island unemployment over the 1950-1971 period, obtaining a correlation

coefficient of 0.70 (Fig. 18). The fitted equation is


m = 39.2 4.04 U (3-13)


However, the data from the years since 1972 fall far outside this

historic relationship, suggesting that the parameters influencing net

migration have changed significantly during the 1970s.

It is hypothesized that high rates of net immigration to the

island, despite the highest unemployment rates of the entire development





69











10 -





0*-



CL
00
40 0 -







-20 *






-30
of- -10 '
m 16.-2.98 U







S11 12 13 14 15









Difference in Unemployment Rates
(Puerto Rico United States, percentage)


Fig. 17. Net immigration to Puerto Rico as a function of the
difference in the unemployment rate in Puerto Rico and
the United States in the preceding year. This relation-
ship achieved a somewhat better linear regression fit
(r2 = .50) than the comparison of unemployment and net
migration during the same year (r2 = .37).
migration during the same year (r2 = .37).

















1972
0


*1974

1973


'1977
1976


Si975


RE'RESSION 1950-1971
m= 39.2-4.04 U
r2= 0.70
o


0
r-





ai
0 3
C 0.
0


.- 0

CO
c-o




r-


o o


*1


Unemployment Rate
(percentage)


Fig. 18. Correlation of net immigration to Puerto Rico with the
unemployment rate in Puerto Rico. Data from years 1972-
1977 are plotted separately because they do not fall
within the historic relationship.


-20





I

-30 i







-401,
10


i i i I I I I i


I :










period, have been promoted by the growing magnitude of transfer pay-

ments. When transfer payments per capital (in constant dollars) are

added as a second independent variable to the linear migration model,

the correlation coefficient is improved to 0.83. The fitted equation

is


m = 24.8 0.158 G + 1.55 U (3-14)


where


G = transfer payments per capital (1954 dollars)


This suggests that income transfers have indeed had a measurable ef-

fect on recent migration.

However, it is not possible to forecast future migration using

the function relating net migration to unemployment as well as income

transfers (Equation 3-14). Use of this relationship would generate

continuing strong net immigration to the island unless a dramatic

decrease in transfer payments occurred, which appears unlikely. It

seems more likely that the population of Puerto Ricans (or others) who

might be influenced to migrate to the island as a result of welfare

considerations will eventually be exhausted, and immigration due to

income transfers will diminish as the supply of "welfare migrants"

becomes reduced. However, there appears to be no manner in which the

total population of potential "welfare migrants" can be estimated, so

an alternative migration model has been used.

Migration between Puerto Rico and the mainland is modeled

on the sole basis of the unemployment rate in Puerto Rico:










m = 39.2 4.04 U + I (3-15)


where


I = adjustment parameter for immigration rate (Fig. 19)


In order to account for the high rate of net immigration during the

1970s, despite high unemployment on the island, the function "I" has

been used to temporarily shift to the right the curve which was fitted

to migration data over the 1950-1971 period in Fig. 18 (Equation 3-13).

This function reflects that the "zero migration" level of island

unemployment was temporarily shifted due to the dramatic change in

other conditions, such as the presence of increasing levels of

transfer payments and possibly reduced benefits and job opportunities

in New York City during that city's fiscal difficulties in the early

1970s. This has been accomplished by first increasing and then

decreasing the intercept value in the migration equation using the

function values from Fig. 19.

The future value for the function in Fig. 19 is maintained

at a higher level than the pre-1971 period to reflect the effect of

the increased level of transfer payments on migration patterns. Zeli

(1973) has hypothesized that the higher unemployment rate among

return migrants (Table 7) could reflect a strategy of maximizing income

assistance payments, and the empirical data used in Equation 3-14

does suggest that increasing transfer payments have been influential

in promoting return migration to Puerto Rico. If it is true that a

significant portion of the return migrants are being induced to migrate


















O
0

N QW

*r- E
o


2 2


0
0 -C U



Or-



w 0
= 4-> -,
OO
0 Q. O
0 0 4- )



C
4 4- U
*r- 0








r ., L.
*' -

0 4-
a -n u

U *l- c w
z 2>(-







-C
Q-C~'




n 0

C0
0^) C I-U C S



4- re -


I o S- -c E


U.- or
2 0 2
E *'- a


0o




S2- *- 0)
N CJ)





S- > 0 0




0<
or (0 fl re












*r-
LTu
---- ____ ____ ____ ____ ____ ____ -; 3








OT
iZ










due to the increased level of income assistance available on the

island, then the rate of unemployment needed to achieve zero migra-

tion is likely to be higher in the future.


Economic Sub-Model
General Equations

Economic relationships are constructed to model historic and

future levels of income and employment in Puerto Rico.1 Only three

state variables (level equations in the DYNAMO language) are modeled

in the economic sub-model. Two of these are for locally owned and

externally owned stocks of productive capital, respectively, and the

third is for consumer assets. The general form for the stock

equations is


Kt+1 = Kt + At (St Yt A Kt) (3-16)

where


S = rate of savings and investment

Y = income (1954 dollars)

A = rate of depreciation

K = stock of capital (1954 dollars)


All other equations express instantaneous values, and as such are
"auxiliary" equations in the DYNAMO language.


1A11 dollar quantities in the model and the text of this
chapter have been adjusted to 1954 value.










Performance of the economic sub-model is determined largely by

the behavior of the two stocks of productive capital and by values of

functions determined exogenously and varied from one model run to

another to generate alternative future scenarios.

In contrast to the population sub-model, in which the

parameters remain constant for all model runs, parameter values in the

economic sub-model are altered for each model run to generate alterna-

tive scenarios. The parameters which are manipulated and the character-

istics of each of these four scenarios are summarized in Table 8.

Scenario "A" is a constrained extrapolation of historic growth

trends, the rate of future local savings stabilizing at zero. Scenario

"B" is perhaps a more probable scenario, reflecting a somewhat lower

growth rate of external investment plus a perturbation in investment

flows in the later 1980s caused by, perhaps, a second petroleum

embargo. Scenarios "C" and "D," respectively, consider the changes

which might accompany low or zero levels of growth in external invest-

ment, combined with increasing levels of local savings and investment.

The specific values for each parameter in each of the scenarios are

found in Figs. 26, 30, and 37 in this section.


Productive Capital

Sources of capital. Economic development ultimately proceeds

from human development (Schumacher, 1973). An underdeveloped area is

an area populated by underdeveloped people. The development (or

importation) of human resources makes possible the mobilization of

physical resources which results in the production of wealth. The












Table 8. Input Scenarios for the Puerto Rico Regional Model.

Scenario
Parameter A Bd C D

Fta High Medium Low Zero
Sb Zero Low High High

CLRc High High Low Low

aForeign investment rate.
bpuerto Rican investment rate.
cCapital-labor rate.
dIn scenario "B" the stream of investment is perturbed in the
late 1980s resulting in a period of decreased investment, similar to
the effect of the 1973 oil embargo and subsequent recession.










utilization of capital equipment is the key element of the development

process which permits increasing economic output (and resource in-

puts) to be achieved. Industrial capital is that physical structure

which enables human labor to be effectively coupled with the energy

available from fossil fuel and other energy sources to achieve

productivity increases.

The development process is characterized by changes in the

structure of the socioeconomic system which creates an increase in

the rate of savings, investment of these savings in the accumulation

of productive capital, and resultant increases in production. Some

of these changes are necessary preconditions to development, whereas

others may be considered a product of that process (Rostow, 1958;

Kuznets, 1958; Gunder-Frank, n.d.).

Physical investment in capital, as evidenced by structures

and machinery, is the last step in the organization of a productive

process. Capital investment may be taken as evidence of the avail-

ability of adequately skilled labor and managerial expertise, the

presence of industrial and other requisite technology, the functioning

of financial institutions, and the anticipated ability to market the

goods produced. When the decision to make productive capital invest-

ment in a region is repeated by numerous entrepreneurs, be they

individual, corporate, or government, then the development process is

begun. This process may be sustained and regular increases in output

achieved when a sufficient rate of capital investment is achieved.

Thus, capital accumulation becomes the focal point of regional or

national development (Lewis, 1958).










The income stream generated by an economy may be divided

between consumptive expenditures and savings, with the latter being

available for investment in productive capital. This capital is

created by foregoing current consumption, thereby permitting a portion

of production to be devoted to the creation of capital stocks which

can be employed to increase future levels of production.

There are large differences in the tendency for various

sectors of society to accumulate savings. The top income group

accounts for most personal savings, and lower income groups have low

or even negative savings rates. However, total personal savings is

not large when compared to business savings, which constituted an

average of 71 percent of total savings in the United States over the

1970-1977 period. Lewis (1958) has proposed that when the rate of

capital accumulation in an economy is low it may be traced to the

small size and/or low profits in the productive sectors which provide

the capitalists, be they private or government, limited resources

and poor incentive for re-investment.

Merhav (1969) has noted that the central issue lying at the

root of economic development theory is the problem of escaping from

the low-level equilibrium trap. In this trap an economic system

cannot achieve positive real per capital growth because of the in-

adequacy of productive investment, which in turn cannot be achieved

due to the low level of per capital income and savings. This low-

level trap has been described for Puerto Rico by Friedlander (1965),

and is summarized in Fig. 20.























W \ Without C1
I- \
4 *



I-



S-'- Population Growl
0 With Emigratiol



Minimum Income
Level Required
for Migration
TRAP-



INCOME PER CAPITAL






Fig. 20. Low-income trap.
Source: Adopted from Friedlander (1965).










The classic low-income trap is created when the rate of

population growth in an economy grows faster than the economic growth

rate, resulting in continual impoverishment and failure of the local

economy to generate capital resources needed to finance higher rates

of economic growth. Development theory holds that the trap may be

avoided by increasing national investment by using the input of foreign

capital, or through the control of population growth rates (i.e., by

exporting migrants in this case). Both methods have been applied in

Puerto Rico.

The upward sloping curve of investment represents the increas-

ing rate of investment which is assumed to occur as a result of a

positive marginal rate of savings in response to income increases.

The downwards concavity of the curve reflects a hypothesized decrease

in the marginal productivity of capital at higher levels of economic

development. The manipulation of capital and investment is the

critical variable for the "escape," and is a central parameter in

the formulation of many development models and policies.

Friedlander (1965) postulated that Puerto Rico could avoid

this trap by achieving rapidly increasing income levels through

externally financed industrialization, and achieving population

stabilization through migration. The resultant income increases were

anticipated to create an increase in the savings rate until the local

investment resources became sufficient to finance the development

process. That the rate of savings should increase as a function of

income is suggested by cross-sectional data, such as shown in Fig.21.





81











15
S15 ; ----------------;

10 1- ,

c>) 5I^-

&4- 0_L
S r-



M -10



C 5 10 5

Family Income
(thousands of current dollars/year)





Fig. 21. Cross-sectional savings characteristics of Puerto Rican
families as a function of family income.
Source: Committee to Study Puerto Rico's Finances, 1975.










However, the extrapolation of cross-sectional savings behavior

to income increases over time is not valid, as can be inferred from

previous experience elsewhere as well as from post-war patterns of

savings in Puerto Rico. Long-term income and savings data for the

United States and Puerto Rico, graphed in Fig. 22, show that the per-

centage of income saved has not increased regularly as a function of

income increases over time. The post-war rate of savings in Puerto

Rico has declined steadily, showing clearly that increases in income

have not increased the rate of savings in the local economy.

Estimation of capital stock. The total annual addition to

capital (gross domestic investment) consists of additions to fixed

capital plus changes in inventory. The net addition to fixed capital

may be computed by discarding inventory changes and subtracting the

annual depreciation from the gross addition to fixed capital. Housing

stocks are included in the estimate of productive capital, being

necessary to produce housing services, the value of which is reflected

in the national income accounts.

An official estimate of capital stock is not prepared by the

Puerto Rico Planning Board, but an estimated capital stock series

(excluding land) has been constructed for the island (see Appendix A)

and is summarized in Fig. 23. Total productive capital is divided

into two classes, that which is locally owned (aK) and that which is

externally owned (bK), as imputed by earnings data, assuming that

the earnings rate of locally and externally owned capital is identical.

The net inflow of external capital into Puerto Rico is modeled as a


















10 o o

> 0
a -8 o o
00 1977
E 11929
o 6-


S 11940 7
"_ o

S, 9947









o 947
LEGEND
(10
o -





S1977 Puero Rico


0 194700







Personal Disposable Income per Capita
(1954 dollars)




Fig. 22. Relationship between personal disposable income per capital
(in constant 1954 dollars) and percentage of income appear-
ing as personal savings for the United States and Puerto
Rico.





ing as personal savings for the United States and Puerto
Rico.




84












10









O 6









show9 ng total cdCapital Stock oc w d
940' o P6 s f0





Year









Fig. 23. Capital stock series for Puerto Rico (excluding land),
showing total capital stock and capital stock owned by
residents of Puerto Rico, as imputed from earnings.

Year










contribution to the stock of externally owned capital, while local

savings and investment is contributed to the stock of locally owned

capital (it is assumed that savings equals investments). The

depreciation rate is the same for these two stocks of capital. The

equations are


aKt+ aKt + At(S Y aKt Ak) (3-17)

bKt+l bKt + At(F bKt Ak) (3-18)

where


S = rate of local savings or investment

Ak = capital depreciation rate

Y = GNP of Puerto Rico (1954 dollars)

F = rate of foreign investment (1954 dollars/year)

aK = locally owned capital (1954 dollars)

bK = externally owned capital (1954 dollars)

Earned income, minus savings, plus transfer payments (G), is

equivalent to local consumption, and is contributed to the stock of

local consumer assets (cK):


cKt+l = cKt + At[Y(1- S) + G Ac cKt) (3-19)

These consumer assets represent a mixture of consumer durables and

non-durables, not including housing (which is counted as productive

capital). A depreciation rate of 50 percent is estimated for this










stock. Inasmuch as this stock has no effect on any other model

parameter, inaccuracies in this parameter will not affect model per-

formance.

External sources of capital. The capital required to finance

investment activities can come from two sources: savings from within

the economy, or some external source of savings. A bottleneck to

economic growth can be created by the insufficiency of local invest-

ment resources and the propensity to invest the available savings in

relatively non-productive endeavors (e.g., real estate). This bottle-

neck may be broken perhaps most readily by importing financial capital

and entrepreneurship. Having experienced poor results in the govern-

ment financed and managed industrialization projects in the late 1940s,

the importation of capital and entrepreneurship became the development

policy adopted by the island's government (Ross, 1966). Relatively

little emphasis was given to the development of local entrepreneurship

(Curet-Cuevas, 1976).

The time series of Gross Domestic Investment on the island is

portrayed in Fig. 24, showing the increasing role of external invest-

ment as a source of capital compared to the role of local savings,

which have actually become negative in recent years. The computation

of the percentage contribution of each major source of savings to total

investment on the island is plotted in Fig. 25, showing even more

clearly the poor record of local savings formulation and the heavy

reliance on external capital sources.









1000


500 H


1940


1960
Y E A R


1970


1980


Fig. 24. Sources of Gross Domestic Investment (GDI) in Puerto
Rico, showing the contribution from local and external
sources.
Data source: Puerto Rico Planning Board (1978c).


iO0






50


-50-
1940


1950 1960 !970
YEAR


1980


Fig. 25. Gross Domestic Investment in Puerto Rico, showing the percen-
tage contribution of four sources of savings: (A) net ad-
justed inflow of external capital, (B) depreciation,
(C) government savings, and (D) private savings. Note that
private savings is plotted with respect to zero, and all
others are plotted with respect to private savings.
Data source: Puerto Rico Planning Board (1978c).


/ investment



Local iestment
Local investment \t


I I










The annual rate of foreign investment has been modeled as an

exponential growth equation which has been constrained by a decreasing

rate of growth:


Ft = $850x106 3 + 6e-.03(T-1979)(T-1979) (3-20)


where


Ft = annual external investment (1954 dollars)

6 = initial value for annual capital growth rate


The decreasing rate of investment growth reflects the hypothesis that

many of the conditions which contributed to Puerto Rico's rapid post-

war economic growth rate are transient in nature, and are weakening as

a result of increasing local wage levels, increased local energy cost,

and changes in industrial tax incentive programs.1 The values of Ft

used in each scenario are summarized in Fig. 26.

Although capital importation has generated rapid economic

growth, it also has created external repayment obligations against the

stream of business profits since most entrepreneurs were nonresident

individuals or corporations. Not unexpectedly, net property earnings

remitted to nonresidents have increased dramatically, from 7 percent

of total property income on the island in 1947 to 62 percent in 1977.

In 1962, externally owned industries accounted for 60 percent of the

1The future of the tax incentive program is uncertain,
particularly inasmuch as it is intimately linked to the issue of
statehood. Were Puerto Rico to become a state it would no longer be
possible to offer federal corporate income tax exemption as an
industrial incentive.


















2,000


Extern!a Investment (Ft)


/
/
!,/

I I
II
A I
I \
I
/ I -c

! ID

,;'. j


1,000 -


1940


1960


1980
YEAR


2000


2020


Fig. 26. Scenarios for the rate of external investment in Puerto
Rico, for use in the regional model.


_ I I I


OL


U I









total value added in manufacture on the island, and this figure had

risen to 70 percent by 19671 (Curet-Cuevas, 1976).

The rate of profit remission is calculated as the product of

the value of the externally owned capital and the rate of return

earned by this capital:


Ht = bKt(.12 + 0.113e--07(T-1946)) (3-21)

where


Ht = remission of profits (1954 dollars)


The historical and projected change in the rate of earnings from ex-

ternally owned capital in Puerto Rico is summarized in Fig. 27.

Local sources of capital. Low levels of local savings have

plagued the island economy throughout its entire history, having roots

in the colonial era when business profits and savings were remitted

to Spain (Lewis, 1963). Restricted savings rates continued to be a

problem of post-war development (Comitd Interagencial, 1975; Curet-

Cuevas, 1976; MacCoby and Fielder, 1972). There is no clear explana-

tion for the low and decreasing level of local savings and investment,

which have decreased despite rapid economic growth (Fig. 28). Suggested

reasons for low or negative rates of personal savings2 have been listed

by the Committee to Study Puerto Rico's Finances (1975, p. 27):


1More recent data are unavailable.
2Includes savings from unincorporated businesses.















Lo
20


-.07(T-1946)
y= 12+ 11.3e92
r2.092



--


(V


1950


1960


1980


1990


Year







Fig. 27. Historic and projected rate of return on externally owned
capital in Puerto Rico. Regression equation fitted over the
period 1947-1977.


rC
S-



4- W

4-) rC
+* 0
rO*-^
Q;


20C0