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 Front Cover
 Title Page
 Introduction
 What the CBI proposed for Puerto...
 Puerto Rico and the CBI: Interdependent...
 Conclusions
 Notes






Group Title: Impact of the Caribbean Basin Initiative on the Puerto Rican economy
Title: Impact of the Caribbean Basin Initiative on the Puerto Rican economy. Main paper.
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 Material Information
Title: Impact of the Caribbean Basin Initiative on the Puerto Rican economy. Main paper.
Series Title: Impact of the Caribbean Basin Initiative on the Puerto Rican economy
Physical Description: Book
Language: English
Creator: Grusky, Sara
Publisher: Puerto Rico Research Institute
Publication Date: 1988
 Subjects
Subject: Caribbean   ( lcsh )
Spatial Coverage: North America -- Puerto Rico -- Caribbean
Caribbean
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Bibliographic ID: UF00081766
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
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Table of Contents
    Front Cover
        Front Cover
    Title Page
        Title Page
    Introduction
        Page 1
    What the CBI proposed for Puerto Rico
        Page 2
        Page 3
    Puerto Rico and the CBI: Interdependent futures
        Page 4
        Page 5
        Page 6
        Page 7
    Conclusions
        Page 8
        Page 9
        Page 10
    Notes
        Page 11
Full Text

Institute de
Investigaci6n Puertorriqueno


Puerto Rico
Research Institute
P.O. Box 11204
Washington, D.C. 20008
(202) 337-2234


Apartado Postal 11204
Washington, D.C. 20008
(202) 337-2234


OCCASIONAL PAPERS SERIES



































Impact of the Caribbean Basin

Initiative on the Puerto Rican Economy



Sara Grusky

April 1988





INTRODUCTION

This paper seeks to examine the impact of the Caribbean Basin

Initiative (CBI) on the Puerto Rican economy. First, it is important

to recognize that the CBI is not merelyaneconomic revital nation

program. The impetus of the CBI lies in the recognition of the

intrinsic relationship between economic, social, and political

development and the U.S. security interests in maintaining stability

in all of these spheres. Therefore, any discussion of the impact of

the CBI on the Puerto Rican economy and the successes or failures of

the Initiative is best undertaken with an integrative understanding of

its social, political, as well as its economic motives.

The first section of the paper will attempt to set the CBI within

the context of the pre-existing trends in the Puerto Rican economy

with the aim of identifying what aspects of the CBI further pre-

existing trends and what aspects may run counter to these trends. In

this context we may be better able to identify possible effects of the

CBI on the Puerto Rican economy. The second section will identify the

plan or proposition of the CBI, both the spoken and the unspoken

aspects, and particularly the role for Puerto Rico within the CBI.

The final section will attempt to answer the question: What effect has

the CBI had on the Puerto Rican economy?

TRENDS IN THE PUERTO RICAN ECONOMY

Probably the most important trend in the Puerto Rican economy is

its increasing integration into the U.S. economy as well as the global )

econoj,- When President Reagan launched the Caribbean Basin

Initiative in 1982, the effects of two major recessions, the energy

crisis, and high inflation had left the Puerto Rican economy weakened,

showing the decade of the 1970s was not the most propitious time for






greater economic integration into the rest of the world. However, by

-. 1986, the Puerto Rican economy again mirrored the U.S. and showed a

significant recovery registering a 2.6% real growth rate in GNP. In

1987, the Puerto Rican economy showed further recovery with a 5.1%

real GNP growth rate.(1)

While the Puerto Rican economy may mirror that of the U.S., its

dynamism is based on distinct features. Beginning in the 1950s,

Puerto Rico's "Operation Bootstrap" promoted private sector

manufacturing investment based primarily on wage and tax incentives.

The "industrialization by invitation' development model showed initial

successes stimulating an average real growth rate of 6.96% between

1948 and 1973.(2) However, rising wage rates on the island,

increasing competition from the East Asian NIC's, and poor global

economic indicators quickly revealed the limitations of this model in

the mid-1970s. Since that time, the Puerto Rican economy has relied

increasingly on direct federal transfer payments (primarily in the

form of food stamps) and capital intensive investment (primarily

pharmaceutical companies) that chose to locate in Puerto Rico because

of significant tax exemptions through Section 936 of the federal tax

code. In summary, the Caribbean Basin Initiative was announced at a

time when the Puerto Rican economy was in state of disarray and the

structural weaknesses of the Bootstrap model had been revealed.

Puerto Rico was finding it increasingly difficult to attract industry

as a low wage site.

WHAT THE CBI PROPOSED FOR PUERTO RICO

The CBI responded initially to the national security implications

of rapid socioeconomic and political changes in the newly emergent





Caribbean nations. Because of significant U.S. security concerns in

Central America, this region was later included with the Caribbean

islands in the newly defined geographical concept called the

Caribbean Basin." In this context, Puerto Rico was periferal to the

more immediate concerns that initially generated the Caribbean Basin

Initiative.

Puerto Rico was not only periferal to the original policy

conception of the CBI, it was also initially opposed by the Puerto

Rican government who argued that opening the U.S. market to the rest

of the Caribbean countries would reduce the competitive advantage of

Puerto Rican industry. The CBI was seen as exacerbating troublesome

pre-existing trends in the Puerto Rican economy such as the decline in

investment and employment. The competitive advantage of investment in

Puerto Rico had already been undercut by the federal minimum wage law,

federal environmental shipping, and safety regulations, and the

Generalized System of Preferences and Tariff Items 806.30 and 807,

which had already increased access to the U.S. market for many

Caribbean products. The CBI was seen as one more blow against the

already weakened Puerto Rican economy.

Eventually certain adjustments were made so as to gain Puerto

Rico's support for the Initiative. U.S. officials recognized that

Puerto Rico was not only an important ally on the diplomatic front,

but as one of the more developed Caribbean islands, it had important

financial, trade, and technological resources without which any

regional development plan would be severely handicapped. From the

Puerto Rican perspective, the CBI, along with the overall increased

geostrategic importance of the Caribbean region, gained for Puerto

Rico new leverage that could be applied toward increased autonomy as







well as other economic and political concerns. The final draft of the

CBI included special tax advantages for Puerto Rico as well as the

definition of Puerto Rico as a beneficiary country for the terms of

the provision that 35 percent of the value of CBI eligible products

must be added in the region. There were also less explicit

commitments to make Puerto Rico a transportation, trade, and financial

hub in the region.(3)

PUERTO RICO AND THE CBI: INTERDEPENDENT FUTURES

In 1985 the U.S. Treasury threatened to alter Section 936 of the

U.S. tax code, potentially removing the tax exemptions provided to

U.S. orponraions in Pnerto Rico. As Puerto Rico's wage advantage has

declined, the tax advantage provided by Section 936 has played

increasing importance in attracting foreign investment. The

investment stimulated by Section 936 has been primarily situated in

the capital intensive pharmaceutical and chemical ind-ustries and

while not stimulating job creation, Section 936 has stimulated the

financial sector generating $20 billion in new deposits from 1980 to

1984 and accounting for 44% of total bank deposits.(4) In order to

preserve the economic benefits of Section 936, Puerto Rico's governor

ernandez-Colon proposed that some of the 936 funds be used to finance

CBI development projects in the region in the form of twin or

complementary plants. The CBI had yet to bring any substantial

revival to the sagging Caribbean economies and therefore concerns of

the Treasury Department were overridden by the Administration's CBI

proponents who hoped the Puerto Rican proposal would help to stimulate

more investment in the region.

The twin or complementary plant program became an important basis






of Puerto Rico's participation in the CBI. This program redefined the

international division of labor with new sophistication placing Puerto

Rico in an intermediary role as the MDC or "more developed country" of

the Caribbean region. With the twin plant program, U.S. corporations

can transfer low-wage assembly aspects of production to other

Caribbean islands while maintaining their base of operation in Puerto

Rico and thereby retaining certain tax and trade advantages, in

particular the 936 tax exemption as well as Puerto Rico's position

within the U.S. customs area. Puerto Rico, although no longer

competitive as a low wage site, has a developed infrastructure that

would provide financial, trade, transportation, and other commercial

services to U.S. corporations or other investors interested in the

twin plant program.

Puerto Rico's proposal to use 936 funds to finance twin plants in

the region was essentially a political solution that attempted to meld

the interests of Washington to promote Caribbean development, the

interests of U.S. corporations in Puerto Rico to maintain their tax

advantages, and the Puerto Rican government's interest in maintaining

Puerto Rico as an attractive investment site for U.S. business. What

at first appeared to be a creative political solution has actually

placed Puerto Rico in an untenable intermediary position between the

reluctance of the U.S. corporations to invest their 936 monies, and

feelings of the small Caribbean countries that run the gamut between

charges of broken promises and charges of Puerto Rican "imperialism."

Puerto Rican officials, after raising expectations of the

Caribbean countries, have had to admit that these are not government

funds. Although they may reside in the Puerto Rican Government

Development Bank, the bank has to account for these monies to the







corporations.(5) In addition, Puerto Rican government officials are

not willing to lend out these funds unless there will be dual benefit,

for Puerto Rico as well as the Caribbean country involved and this has

meant that the projects must take the form of twin plants.

The criticisms that the Caribbean countries have made of the

Puerto Rican twin plant proposal are reflective of criticisms that

Caribbean countries have made of the entire Caribbean Basin

Initiative. Essentially, the 936 funds offered by Puerto Rico would

not be accessible to most small Caribbean producers. They are

appealing to large U.S. companies that are of a scale where a contract

operation in a low wage Caribbean country combined with the tax

advantages of Puerto Rico make an attractive package. Caribbean

government officials have criticized the CBI concept because it tends

to direct resources away from small farmers, small businesses, inter-

regional trade, and regional institutions and directs resources to an

export sector that benefits a narrow elite.(6) Puerto Rico's proposal

to use 936 monies for complementary plants is perceived by Caribbean

officials as perpetuating this thrust of the CBI. There is also the

added problem that many larger U.S. or other foreign companies do not

view the small Caribbean countries as attractive sites because there

is not adequate infrastructure development to support their

operations. There is no funding available through the CBI or the

Puerto Rican proposal to develop this necessary infrastructure. In

addition, Puerto Rico's attempt to cast itself as an intermediary

power in the region has been resented by some of the Caribbean

countries. The late Prime Minister of Barbados, Errol Barrow, was







particularly negative in his characterization of the Puerto Rican

proposal.

"I hope Governor Colon will be able to explain to me
why they are asking us in the Eastern Caribbean to
be relegated to the situation of hewers of wood and
drawers of water, so that the Commonwealth of Puerto
Rico can continue to enjoy the U.S.$700 million worth
of benefits which they now derive from Section 936 ..."(7)

The Puerto Rican program to fund CBI twin plant projects with

936 funds has received a fair amount of attention and debate.

Unfortunately there is little to show for all of the discussion and

this tends to corroborate the view that the Puerto Rican proposal was

more a political gesture to maintain Section 936 of the U.S. Tax Code

that a genuine economic development initiative. Originally $700

million in 936 funds was promised to promote development in the

Caribbean countries. This figure was later reduced to $150 million

and it is estimated that approximately $30 million has been actually

loaned out to twin plant projects.(8) During the recent Congressional

hearings to revise the CBI, attention was brought to Puerto Rico's

failure to make available the promised funds and Congressional

pressure has been used to urge Puerto Rico to fulfill its part of what

was perceived as a "deal" to preserve Section 936.

In addition to the twin plant program, Puerto Rico has

participated in the CBI as a significant recipient of federal

procurement contracts. In 1985 President(ius announced that CBI

eligible countries would be able to compete for federal procurement

contracts in an attempt to add steam to the flagging Caribbean Basin

Initiative. This represented a conjuncture of interests. The

Department of Defense (DOD) had become increasingly concerned about

dependence on Far East producers by prime contractors for electronics







and other goods and was interested in creating a competitive, nearby

regional industrial capacity.(9) At the same time, the Reagan

Administration's CBI was attempting to promote economic development in

the region in response to U.S. national security concerns. Defense

procurement contracts could play a significant role in bolstering the

economies of the region while at the same time meeting DOD objectives

of creating a competitive supplier network nearby.

The Department of Defense has initiated a special program to

increase dLfe-nse procurement contracts in Puerto Rico. The program

has encouraged the use of the twin plant model where the base

operation in Puerto Rico could subcontract for the manufacture of

components and sub-assemblies in other Caribbean islands. The fastest

growing sectors in the Puerto Rican economy are in the pharmaceutical,

and electronics industries. A significant amount of this growth has

been stimulated by federal procurement contracts. In addition, the

Puerto Rican textile industry which had been on the decline due to

Relocation to lower wage sites has been bolstered due to new federal

contracts. Defense prime contracts over $25,000 rose from $187

million in 1983 to $500 in 1985.(10)

CONCLUSION

While the other Caribbean economies continue to suffer, showing

little if any improvement, the Puerto Rican economy has shown

significant revitalization. Puerto Rico's prior level of

industrialization and close political relationship with the U.S. has

enabled it to take advantage of the economic benefits of the CBI as

well as the U.S. national security concerns that such a program

implies.






The economic development plan proposed by the CBI is essentially

similar to Operation Bootstrap, the U.S. plan used to develop Puerto

Rico in the 1940s. As an outgrowth of this economic development

strategy, Puerto Rico has been well suited to further its

implementation. While U.S. and other foreign corporations have not

been as eager as administration officials had hoped to invest in the

smaller Caribbean islands due to lack of infrastructure, services, and

concerns about political risk, Puerto Rico has shown significant

growth in ts manufacturing sector, particularly in pharmaceuticals

and electronics. Net income in the manufacturing sector grew 4.2% in

1986 and 13.5% in 1987.(11) This increased growth is generally

attributed to perceived stability in Section 936 tax advantages,

rather than directly due to the CBI. Federal procurement contracts

have further spurred the Puerto Rican economy and again the smaller,

less developed Caribbean countries have been less able to take

advantage of this aspect of the CBI. Finally, Puerto Rico's service

sector is playing an increasingly important role in the economy

generating 72.5% of total employment on the island.(12) The most

dynamic growth area of the service sector is found in seryi~ses oriented

toward producers such as financial, commercial, trade_ communications

and legal services.
---- "--~~- __ .I
Puerto Rico has benefitted not just from the CBI, but also from

the overall increased importance attached to U.S. national security

objectives in the Caribbean. The CBI essentially links U.S. national

security to economic stability in the Caribbean. Because of this,

Puerto Rican based firms have received priority treatment in obtaining

federal procurement contracts and the 936 tax exemption appears

secure. All of this has contributed to Puerto Rico's economic







revitalization. Puerto Rico's twin plant program, on the other hand,

S appears less successful. Although Puerto Rico has placed new

attention on fostering diplomatic relations with its Caribbean

neighbors and has attempted to market itself as a financial, trade,

and commercial service center for potential Caribbean investors, the

twin plant program does not appear to be having a major impact on

encouraging investment in the small Caribbean nations. Despite the

CBI, the declining U.S. sugar quota has generated a continuing

downward trend in Caribbean exports to the U.S. The CBI and Puerto

Rico's twin plant program cannot claim successes in this regard.

The CBI does not attempt to address the fundamental structural

dependence of Puerto Rico on the U.S. regional economy. Rather, it

has attempted to revitalize the structures of this dependence. Many

would argue that Puerto Rico's current economic vitality is less due

to the CBI and more due to the advantages generated by Puerto Rico's

special relationship with the U.S. An economy that attracts investment

based on the financial benefits of Section 936 of the U.S. tax code

and federal procurement contracts will have a highly dependent and

superficial character. While some have criticized Puerto Rico's

economic and political relationship with the U.S., others have argued

the opposite perspective and stated that the CBI will not be

successful unless it offers the rest of the Caribbean the tax and

trade advantages Puerto Rico enjoys.




FOOTNOTES

1. Government Development Bank for Puerto Rico, "Puerto Rico Business
Review," special supplement, 1988, page 1.

2. Finn, Bertram P., "Puerto Rico's Economic Development: The Old
Formula No Longer Works," Puerto Rico: The Search for National
Policy, ed. Bloomfield, Richard, Westview Press, 1985.

3. Hearings regarding the Caribbean Basin Initiative before the
Subcommittee on Trade, Committee on Ways and Means, U.S. House of
Representatives, March 17, 23, 24 and 25, 1982.

4. Pantojas, Garcia Emilio, "La crisis del modelo desarrollista y la
reestructuracion capitalist en Puerto Rico; hacia una redefinicion
del rol de Puerto Rico en la economic hemisferica," CEREP, San Juan,
Puerto Rico, May 1984.

5. Proceedings of the Symposium sponsored by the Western Hemisphere
Sub-Committee of the U.S. House of Representatives and the Development
GAP Organization at the Barbados Hilton Hotel, September 18, 1987.

6. Ibid.

7. Singh, Rickey, "The Promise and the Reality: CBI Struggling for
Success," Caribbean Contact, September 18, 1987.

8. "Puerto Rico and the CBI," Economic Development Administration,,/
Commonwealth of Puerto Rico, November 1987.

9. Sattler, Roger, "Defense Procurement: A Growing Market," The New
York Times, October 20, 1986.

10. "Informe Economico al Gobernador 1987," Junta de Planificacion de
Puerto Rico, San Juan, 1988.

11. Ibid.

12. "Informe Economico al Gobernador 1987," op.cit.




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