The Development of Puerto Rico; D. Bechara

Dennis Bechara The Development of Puerto Rico THE DEVELOPMENT of the Puerto Ri can economy sheds light on the true causes of economic growth. The his tory of the island's development is peculiar to it, but the policies imple mented in Puerto Rico to achieve progress hold universal appeal. A review ofthe economicsituation since the turn of the century may help us grasp the lessons of the Puerto Ri can experience. Historical Background As a result of the Spanish-Ameri can War, the United States assumed jurisdiction over Cuba, Puerto Rico and the Philippines. Subsequent events led to the political indepen dence of Cuba and the Philippines, but the relationship between Puerto Rico and the United States contin ues. Economic conditions were· dismal in Puerto Rico at the turn of the cenMr. Bechara is an attorney in Mayaguez, Puerto Rico. 592 tury. Life expectancy in 1900 was 32 years. The literacy rate at the time was only 15 per cent. The island's economy consisted of subsistence agricultural efforts. The production of coffee,once one of the island's most successful crops, began to languish when access to the Spanish market was lost. .

The nature of the political rela tionship between Puerto Rico and the United States began to change as Congress gradually granted more autonomy to the island. In 1917 American citizenship was granted to Puerto Ricans and certain measures of self-government were enacted. The President, however, continued to appoint the governor and it was not until 1948 that the people were al lowed to elect one. In 1952, Congress approved a Puerto Rican-drafted constitution, and the island became known as the Commonwealth of Puerto Rico.

THE DEVELOPMENT OF PUERTO RICO 593 Puerto Ricans are allowed to elect a non-voting member of Congress. Though they are citizens, they are not allowed to participate in Presi dential elections. The Sugar Economy One of the immediate effects of the Spanish-American War was to place Puerto Rico within the U.S. tariff wall. In 1870, Congress had enacted a tariff to protect domestic produc ers of beet sugar, and this had the effect of driving many of the island's sugar producers into bankruptcy. Once the United States acquired ju risdiction over Puerto Rico, how ever, there was free trade between the two. Capital flowed into Puerto Rico with the effect of modernizing its sugar processing mills. A glance at the production figures illustrates the magnitude of sugar in the Puerto Rican economy. In 1899, approxi mately 40,000 tons of sugar were produced, whereas in 1934, Puerto Rico produced approximately one million tons. By 1940, the sugar in dustry employed one-fourth of the labor force. "Sugar ... paid the ma jor part of the insular taxes, em ployed the major part of its workers, created the major part of its busi ness, supported seventeen of Puerto Rico's twenty seaports in the sense that those seventeen handled sugar exclusively and had no warehouses or other facilities for anything else."!

In spite of its importance in the island's econOlllY,sugar became the subject of ma~y attacks. Puerto Rico was not immp.ne to the ravages of the Great D~pression. The island, which was pqor to begin with, had made some pEogress but it was nev ertheless insufficient to drastically change matteIts. The rise of the sugar industry, however, provided the scapegoat upon which to blame the poor conditioll-sof the island. There is no ~oubt that Puerto Rico, during this time, was impoverished. Theodore Roosevelt, Jr., who in 1929 was governor of the island, wrote the following in The New York Herald Tribune: "We:were and are a prey to diseases of many kinds. In the fiscal year ending June 30, 1929, 4,442 of our people d~ed from tuberculosis. Our death rate from this disease was 4V2 times thel death rate in the con tinental United States. Our death rate from malaria was 2V2 times the rate in the com.tinentalUnited States.

Some 35,000 people in our island are now sufferi~g from tuberculosis, some 20,000 ~rom malaria, and some 60,000 from Q.ookworm." The prevaHing conditions during this period of time, however, were not unusual! given the historical background Of Puerto Rico. To put the blame oni the sugar industry for conditions which existed before sugar became the most prominent indus try is glaringly unfair. The island, moreover, did. make strides in many areas during this time which bene594 THE FREEMAN October fited the entire population. As an example of this, life expectancy had risen to 42 years in 1930 and 46 years in 1940; economic conditions had improved concurrently with these developments. Stumbling Blocks Erected The sugar industry confronted its first obstacle when in 1934 Congress enacted the Costigan-J ones Act. This statute empowered the U.S. Secre tary of Agriculture to administra tively determine the sugar con sumption requirements of the country and to set production quotas from the different areas that sup plied sugar to the U.S. market. A consequence of this statute was to freeze the growth of Puerto Rico's sugar industry. This, coupled with future land reform, served to cripple the industry permanently.

During the later part of the 1930s, public discussion revolved around the low wages paid by the sugar indus try as well as by the industry's large landholdings. In 1937, for example, the average hourly wage rate of ag ricultural employees in the sugar industry was 12 cents. This was thought to be convincing enough ev idence to condemn the industry, and served as a justification for the gov ernment'scontinued intervention. Yet, the Bureau of Agricultural Economics reported the average hourly wage rate for agricultural employees for that year in Puerto Rico to be higher than prevailing farm wage rates in fourteen states. Another of the perceived evils of the sugar industry was its alleged displacement of thousands of farm ers who became unable to support themselves after losing control of their land. The statistics concerning land ownership, which are men tioned below, are sufficient to refute this. However, it should be pointed out that as a result of the implemen tation of modern sanitation and health practices, the island's popu lation nearly doubled by 1930. Even had the sugar industry not flour ished, it is doubtful that the island would have been able to be agricul turally self-sufficient. In fact, now that land has been redistributed· in order to curb these alleged injustices of the sugar industry, the island is still not agriculturally self-suffi cient.

Land Reform As a result of the desire to uproot the perceived evils of the sugar in dustry, a land redistribution pro gram was enacted in 1941. During a frenzied period of time, the Land Authority, the administrative agency empowered· to take over all corpo rate lands that exceeded an arbi trary 500 acre limit, acquired thou sands of acres and either administered the land on its own or subdivided it into smaller plots and transferred them to those deemed 1982 THE DEVELOPMENT OF PUERTO RIqO 595 T~e old Spanishfort "EI Morro" in ISan Juan'souter harbor. Be gyn in 1539and completedover a period of two and a half cen turies, the fort was one of the principalbastionsof the Span isl!l Empirein the New World. deserving. By 1950, the Land Au thority had "acquired nearly half the corporate holdings in excess of 500 acres and was operating 48 propor tional-profits farms, as well as two sugar mills."2 Why corporate holdings in excess of 500 acres were repugnant may be traced to a Congressional Resolu tion pertaining to the Foraker Act of 1900, which established Puerto Rico's position with regard to the federal government. Under this fed eral statute, Congressmen ex pressed a fear that Puerto Rico's in clusion within the U.S. tariff system would encourage corporate holdings by the sugar and tobacco "trusts" that would dwarf the local population.

Consequently, Congressional Reso lution No. 23 of May 1, 1900 was ~.nacted whereby Congress ~x:pressed its qispleasure about the matter. Years later, an energetic politician, Luis Munoz Marin, who was later to !become Puerto Rico's first popular~y elected governor, campaigned op a platform of enforc ing this Congressional Resolution. True, in ord.er for the sugar indus try to effic~ently compete and produce, it w~s altogether necessary for modern stilgar processing equip ment to utilize large holdings of land in order to l@wer the unit costs of raising sugar cane. As a result of this, the average y;ield per acre increased from a half a ton of sugar per acre in 1899 to 3.3 top.s of sugar in 1937. According to the U.S. Soil Conser vation Servic~, Puerto Rico has a to tal of 2,103~000 acres, of which, 1,222,284 are I tillable. The four larg est sugar cQrporations controlled, 596 THE FREEMAN October before 1941, an estimated 166,000 acres, which represented less than 20% of all tillable land. If one inves tigates the available data more deeply, one can discover the aston ishing fact that in 1899 there were 39,021 farms in Puerto Rico whereas in 1935 the number increased to 52,790. In 1910 there were 539 farms which exceeded 500 acres, whereas in 1938 the number had decreased to 335. On the other hand, farmland with an area of no more than twenty acres had increased during this same period of time from 38,274 to 42,004, which represented over three quar ters of all tillable land. 3 However convincing these statis tics may be, when confronted with an emotional "share-the-wealth" ar gument, the downfall of sugar be came inevitable. No sugar mill was able to compete efficiently with a 500 acre limitation. Interestingly, in recognition of this, the govern ment's position after acquiring all of those landholdings was to drasti cally reduce the scale of any further significant land expropriations. But by then the damage was done. Sugar never recovered from these set backs. One by one all of the sugar mills in Puerto Rico either closed or declared bankruptcy. Naturally, in the 1970s the government, recogniz ing sugar's importance to the econ omy, stepped in and created a gov ernment agency called the Sugar Corporation which leased some ofthe mills and proceeded to run them on a profit and loss basis. Predictably, the Sugar Corporation has suc ceeded in amassing substantial losses, at the present totalling more than $600 million dollars.

Collectivist Influences The long term effects of the Great Depression are still being felt in Puerto Rico. As a result of the New Deal's welfare-oriented policies, the Puerto Rican economy became the object of governmental intervention with land reform as only one of its consequences. In 1933 the Federal government created the Puerto Rico Emergency Relief Administration, which by 1935 became the Puerto Rico Reconstruc tion Administration. This agency was endowed with an operating yearly budget of $40 million with which it began social experimentation. One of the PRRA's first activities was to purchase a sugar mill owned by a French corporation, called the Lafayette Central and proceeded to operate it as a model plant. As is usually the case whenever govern ment operates a business, this did not prove to be profitable. Subse quently, the agency proceeded to subdivide the 10,000 acres it had purchased and to let the farmers who acquired these lots run the mill as a cooperative. Once again, the experi ment proved to be a failure and the mill ceased to operate.

1982 THE DEVELOPMENT OF PUERTO RICO 597 But the efforts of the PRRA went beyond operating a cooperative farm. The agency commenced building subsidized housing and built a ce ment manufacturing enterprise and a hydroelectric system. The agency became defunct by 1939 and most of its projects floundered. However, it set a pattern future island govern ments would follow. Fair LaborStandardsAct In 1938, Congress extended the Fair Labor Standards Act to Puerto Rico. The immediate effect of this law was devastating. The U.S. Com merce Department, certainly no en emy of the minimum wage law, ad mits this in its 1979 Economic Study ofPuerto Rico: "Significant job losses followed the introduction of Feder ally mandated minimum wages on the island, the most serious being a drop in home needlework exports from $20 million in 1937, to $5 mil lion in 1940."4 As a result of the devastating ef fects of the minimum wage law in Puerto Rico, Congress approved an amendment, in 1940, whereby in dustries operating in Puerto Rico were allowed to pay wages below the federally mandated minimum, and tripartite committees, which repre sented industries, unions and the government, were set up to periodi cally upwardly revise the. mandated minimum wages.

Parallel with this development, the island's goveIinment proceeded to enact provisio*s for mandatory paid vacations, sic~ leave and other con ditions of employment to be appli cable on an' industry-by-industry level. The justification for this was that since the (ederal minimum wage was not completely applicable to Puerto Rico, !local legislation was needed to supplement this measure. Subsequent 1amendments to the Fair Labor St*ndards Act, however, have elimin~ted the exemption granted to Puerto Rico. As of now a substantial a~ount of industry which affects interstate commerce in Puerto Rico must coptply with the provi sions of the Fair Labor Standards Act. The ma~datory decrees insti tuted by the lPuerto Rican govern ment to grant vacations, sick leave, and other conditions of employment, however, havle not been abolished. Instead they oontinue to be amended in order to raise the benefits con ferred therei*. In addition to this, the Puerto ~ican government has subsequently i enacted provisions re quiring employers to pay maternity pay, dismissa~ pay, nonoccupational disability coverage as well as a mandatory C~ristmas bonus.

The economic consequence of this so-called soci~l legislation has been to raise the c~st of hiring employees with an inevitable high unemploy ment rate. Upemployment has con sistently beep. in the 10 to 12 per cent range during t~e past forty I 598 TH~ FREEMAN October years. Presently, the unemployment rate exceeds 20% while the rate for those in the 14-24 age group is nearly double that figure. Rexford G. Tugwell In 1941, President Roosevelt ap pointed Rexford G. Tugwell gover nor of Puerto Rico, and with this ap pointment the welfare-oriented policies initiated by the Roosevelt administration took hold in Puerto Rico at a dizzying speed. Tugwell's administration truly revolutionized the island, as he took an active part in the drafting of in terventionist policies which have held Puerto Rico captive to this day. Under his leadership, countless statutes were enacted which fol lowed and even exceeded in their zealousness the tenets of the New Deal.

Tugwell's administration was in fluenced in part by World War II, which had a substantial economic impact on the island. This was so because as the production of whis key was curtailed in the continental United States by the federal govern ment, the sales ofPuerto Rican rum in the mainland soared. As part of the Organic Act that governed Puerto Rico's relationship with the United States, it was specified that all ex cise taxes collected in the mainland from any products originating from Puerto Rico would be returned to the Puerto Rican treasury. This meant that during the course of World War II the Puerto Rican treasury re ceived a bonanza in excess of $160 million. As Henry Wells, author of The Modernization of Puerto Rico, put it: During 1940-41 the Puerto Rican gov ernment received only $4.5 million from federal internal-revenue payments, but a year later it got $13.9 million. Enemy interference with shipping in the Carib bean during 1942-43 held the federal payments to $13.6 million, but with the resumption of more normal trade in 1943 44 the amount turned over to the insular treasury came to a phenomenal $65.9 million. After that peak year the main land thirst for Puerto Rican rum slack ened and federal excise-tax yields de clined accordingly, but in 1944-45 the insular government still received $38.6 million, and $35.3 million the following year.

The funds available from the rum excise tax served to finance many projects which were commenced af ter the War ended. According to Earl Hanson: Puerto Rico's budget, which before 1940 had been around $22,000,000, shot up to as high as $150,000,000; with such funds the government could build factories, purchase lands held in excess of five hun dred acres by the sugar corporations, provide machinery for the working and distribution of those lands, stimulate its public-health service, implement its new social legislation, foster cooperatives, and engage in all the multiple activities of a stricken society reshaping itself ...

1982 THE DEVELOPMENT OF PUERTO RICO 599 Government Agencies Assume Role in Economy During Tugwell's tenure, numer ous government agencies were cre ated which in turn assumed an ac tive role in the economy. Among these were the Development Com. pany and the Development Bank. Under their leadership, the govern ment acquired the cement company which had been founded by the PRRA, as well as a pulp board fac tory, a paper company, a glass fac tory, a clay products company and a shoe company. The experience of governmen.t handling and management of all of these enterprises, however, was very disappointing to the planners; even tually, by 1951, all were sold to pri vate enterprise. This decision wa.s motivated by the fact that those en terprises were inefficient, incurred losses and created only approxi mately 2,000 jobs, when the unem ployment level stood at 200,000. The local politicians reluctantly came to the conclusion that govern ment investment was not the pana cea it was thought to be. A change in policy was formulated, which could not be implemented because Tug well opposed it. According to David F. Ross: "Governor Tugwell was firmly and emphatically opposed to the kind of development prograrn which relied primarily on the offer ing of inducements to private capi tal and enterprise."5 Governor Tugwell, however, re signed on June 29, 1946, and this paved the way for the enactment of the Industrial JIncentives Act of 1947, which granted tax exemption status to any companjythat settled in Puerto Rico to produ~e or manufacture des ignated articl~s.

Operation Bootstrap The enactm.ent of the Industrial Incentives Act of 1947 marked a new episode in tne development of the Puerto Rican economy. The law took advantage of! the fact that Puerto Rico is exemRt from federal income taxes, and cop.sequently, plants op erating on the island would be free from this exp~nse. The provisions of the Internal ~evenue Code applica ble both then ~d now permit United States comp~nies to transfer the profits gener,ted by their subsidi aries in Puerto Rico to the mainland tax free. Ther~ is presently a contro versy betwee:p.the IRS and some of these compa~ies over the matter of intra-company pricing and its effect on profits. However, its resolution is not expected to adversely affect the tax exemption program. The effects of Operation Boot strap, as th¢ incentive system is called, have qeen outstanding. Over 2,000 manuf.cturing entities have established plants in Puerto Rico as a result of th¢ tax advantages, with more than 100,000 jobs created. This has been cortsidered the economic 600 THE FREEMAN October miracle of the century, comparable to Germany's recovery after the war.

The GNP figures for the applicable years are similarly impressive. In 1940 the GNP was $287 million, by 1952 it had risen to $963 million, in 1964 it was $4,531 million, and in 1981 it had reached $11,780 million. However prosperous or fortunate the policy of granting tax exemption was, it was nevertheless insufficient to overcome the tremendous unem ployment problem which has chron ically affected Puerto Rico. As the 1979 U.S. Commerce Department study put it: "In the fifties, as the economy was engaged in the first phase of the transition from a mon ocrop agricultural system to an in dustrialized system, total employ ment contracted ..The absorption of labor into the newly developed man ufacturing sector fell behind the rate at which agricultural workers were being laid off. It was only after 1963 that a persistent employment ex pansion was underway. Under the momentum, spurred mainly by cap ital investment induced to enter the economy under the revisions in the Industrial Incentives Act, employ ment improved for a decade. Be tween 1963 and 1973 it increased on the average nearly 3 per cent a year.

In that span of years, the average rate of unemployment dropped to just over 12.5 per cent as an average still highly unsatisfactory, how ever." Petrochemical Developments in the 19605 and 19705 In light of the fact that unemploy ment was still at politically unac ceptable levels, the Puerto Rican government redefined its industrial promotion in the 1960s and pro ceeded to attract oil-related indus tries. This approach was encouraged by the complex federal legislation which, in pre-OPEC days, placed a tariff on foreign oil but permitted the introduction into the country ofcheap foreign oil, once it was processed and refined in Puerto Rico. During the early 1970s oil was imported to Puerto Rico at $2.00 a barrel, and this led to the massive construction of petrochemical complexes in the island. As a result of OPEC's poli cies, however, imported oil is no longer cheap, and Puerto Rico's dis tance from the mainland market has made most of those industries non viable. Over 155 oil related plants alone closed operations in the years 1973 to 1975, and many of the re maining petrochemical complexes have filed for bankruptcy.

Migration has relieved the unem ployment problem in Puerto Rico. Since American citizenship was granted in 1917, there areno barri ers to migration to the United States and nearly one million Puerto Ri cans now reside in the United States. During the 1950s, the average yearly migration was approximately 50,000 persons. The Planning Board, an 1982 THE DEVELOPMENT OF PUERTO RICO 601 agency of the Puerto Rican govern ment, in commenting on the effects of migration on the unemployment statistics during the 1940s said the following: "Without emigration dur ing the decade ... unemployment would have mounted to 201,000 as compared to the actual unemploy ment figure of 101,000 in June, 1950." Yet, in spite of the government's concerted effort in attracting foreign capital to Puerto Rico and the effects of migration on unemployment, the economy has reached a standstill since 1973. Fewer industries have settled in the island and many of those that were already operating have closed their operations.

Institutional Obstacles Reasons for a stagnant Puerto Ri can economy can be traced to insti tutional factors. The laws of Puerto Rico, coupled with federal regula tions, are very burdensome on busi ness. Labor legislation is indeed one of the causes of unemployment in the island. But beyond that, the massive amounts of federal aid have served to create malinvestments of the greatest magnitude. The Puerto Ri can government presently receives over $200 million a year in excise taxes from the U.S. Treasury. This sector provides about 9% of the Commonwealth's budget. During the 1970-77 period alone, over $1,000 million was thus received. This has been sufficient to perpetuate the government's power and to expand its role, while ~inimizing the tax payer's cost of tJ1e government. As a result oif Federal aid, which represents approximately 30% of the island's GNP, the local government has been able ! to engage in many functions beyond the scope of the traditional role! of government. The Federal gover*-ment is currently providing Puerto Rico with such generous beneflts that a majority of the island's families receive food stamps. The V.S. Commerce De partment has a~knowledged the role of federal aid when it stated that "Federal funds directly and indi rectly supply such a large share of total Puerto Ri¢an income that per sonal income exceeds the value of all goods and finall\)ervicesproduced and remaining in the Commonwealth."

Puerto Rico offers certain statis tics that confound anyone knowl edgeable in economics, but which portray the m~gnitude of Federal assistance to the island. As is well known, in order to purchase im ports, any country must export goods or services to pay for the imports. Puerto Rico,however, during the past thirty years h~s consistently run a deficit in its balance of payments. Economists sir4ilarly decry the fact that there is nd internal saving, but rather that Puerto Rico has become a "net dissavert" over this period of time.

602 THE FREEMAN October The local government, following Tugwell's example, has continued its welfare orientation and conse quently controls a large area of the economy. Government is by far the largest employer in the island-em ploying 20% of the labor force. The sugar corporation, the electric com pany, the· shipping lines, the tele phone company and other enter prises are owned by the government. Not unrelated· to this, a Federal Power Commission study indicated that Puerto Rico's electricity rates were the highest in all of the United States. This undoubtedly places the island at a disadvantage in attract ing capital for energy-intensive in dustries. The government's impressive stature in the economy, however, has not followed a classic pattern. Many of the government's functions are performed by so-called public corpo rations which in turn are able to float bond issues. The Commonwealth government's debt, as a percentage of GNP was 15% in 1978. But if one adds the debt of all other govern mental agencies and entities, the figure exceeds 70%. It is apparent that the government's future bor rowing capacity is very limited.

Trade between Puerto Rico and the United States, which represents over four-fifths of the island's commerce, is governed by the Jones Act, a fed eral statute which requires that all trade between domestic ports be conducted in U.S.-flag ships. The ef fect of this statute has been to re move foreign competition from do mestic shippers and to strengthen the grip of the maritime unions on this industry. Consequently, cargo rates of domestic shipping lines are among the highest in the world. This legis lation has also served as an institu tional roadblock impeding Puerto Rico's growth, since Puerto Rico's trade is so dependent on shipping. The WelfareMentality Yet, the most serious of all of the obstacles facing Puerto Rico today is the inculcation of the collectivist and public welfare ideology which was started during the New Deal. This ideology views private enterprise negatively. Conventional wisdom in Puerto Rico holds that the government, ei ther Commonwealth or Federal, is the source of all wealth. This is not hard to understand in light of the fact that government is so omni present in the economy. The "share the-wealth" philosophy has become so embedded that subsidies of all types abound for substantial por tions of the population. It would be beyond the scope of this article to mention the different subsidies that exist in Puerto Rico today. However, historically the most important one was the expropriation on the part of the government oflarge tracts ofland and their subsequent subdivision and 1982 THE DEVELOPMENT OF PUERTO RICO 603 transfer to thousands of people. The power of eminent domain in Puerto Rico is very strong and undOl,lbtedly its effects have shaken the island's economy. The largest landholder at the moment is the government, which owns 130,000 acres of land.

Perhaps a reflection of the welfare mentality that is rampant in Puerto Rico is the flurry, over the past decade, of land squatters claiming their alleged right to hold property. After all, government had· been ex propriating land for so long that it seemed altogether natural to simply take over the land. It has been esti mated that there are over 2,000 acres of land that have been squatted on during this period of time. Politi.:. cians have rushed to the scene in many cases to show their compas sion for this, and it has not been un known for the legislature to enact benefits that reward the efforts of the squatters. The economic crisis which pre vails in Puerto Rico today cannot continue for long without further adverse consequences such as an ap~ palling crime rate and a continued increase in unemployment. The much-publicized tax cuts that were implemer..ted recently, following the advice of Arthur B. Laffer, have been quietly interrupted. The last phase of the tax reduction has been re scinded for fear that it might create a deficit. The miraculous· effects it was supposed to create were non·· existent because the government's role in the ecqnomy has continued to assume a greater importance.

Tourism, wh~ch represents an im portant industry for the island is nevertheless liJriited in what it may be able to achieve for it represents only 5% of GNP. Agriculture is sim ilarly situated. Prospectsfor the Future As a result lof receiving massive infusions of federal funds as well as experiencing the effects of migra tion into the i continental United States, Puerto' Rico's policymakers were able to a.ttenuate the conse quences of their economic policies. As the Commonwealth's govern ment enacted more restrictive regu lations, as it encroached more and more into the workings of the econ omy, the results of these decisions had to be maUnvestments and un employment. But precisely because migration served as a safety valve, and federal funds assumed a major importance in Ithe economy, the pol icymakers became convinced that the interventionist legislation they fa vored could ndt adversely affect the economy. When the federal mini mum wage became completely ap plicable to enterprises that operated in interstate !commerce in Puerto Rico, for example, the government's position was tlaat this could have no adverse effect on unemployment. The government obviously was wrong.

604 THE FREEMAN Many factors influence the work ings of an economy, so that one gov ernmental policy may partially off set the effects of another. This has been the case in Puerto Rico. As progress was taking place in the is land during the decades of the 50s and 60s, people became convinced that the main reason behind such progress resided in the collectivistic policies enacted by the politicians who followed Tugwell's lead. The Effects of Freedom Yet, in analyzing all of the gov ernmental efforts at promoting the local economy, one can fairly say that most of them achieved distortions and malinvestments in the econ omy. However, when private enter prise was granted a substantial tax holiday which offset many of the other costs implicit in starting an operation in Puerto Rico, growth spurted. Foreign visitors came to study the economic miracle that was taking place. Unfortunately, the costs of operating in Puerto Rico, in large part due to the local government's policies, have finally caught up with the tax exemption program, the re sult being that fewer industries are willing to locate in the island.

If there is anything to be learned from Puerto Rico's experience dur ing the past four decades, it is that private enterprise has been the most efficient mechanism for increasing the productivity and the wealth of the people. Policymakers should recognize this and attempt to dereg ulate the economy in order to permit the private sector to bring its dyna mism into the economy. It is encouraging to observe that, in spite of the spending policies of the federal and local governments, the entrepreneurial spirit has not been completely quashed. Regard less of all the subsidies, privileges and controls that exist in the econ omy, people are willing to invest and take risks. The effects of these ef forts would be magnified if the econ omy were freed of all the restraints that hold back its growth. The most significant change, however, is that the collectivist mentality which has been so successfully ingrained must be erased if individualism and lib erty are to prevail. @ -FOOTNOTESlEarl Parker Hanson, Transformation: The Story ofModern Puerto Rico (New York: Simon and Schuster, 1955), p. 31.

2Henry Wells, The Modernization of Puerto Rico (Cambridge: Harvard University Press, 1969), p. 148. 3Cayetano ColI Cuchi, "La Ruina de la Indus tria Azucarera," El Mundo, August 1938. 4United States Department of Commerce, Economic Study of Puerto Rico, 1979, p. 218. Statistics not otherwise footnoted were ob tained from this U.S. Department ofCommerce study. 5DavidF. Ross, The Long Uphill Path: A His torical Study of Puerto Rico's Program of Eco nomic Development (San Juan: Talleres Grafi cos Interamericanos, 1966), p. 79.