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Puerto Rico and the FTAA

¡Qué será de Borinquen mi Dios querido!
¡Qué será de mis hijos y de mi hogar!
-Rafael Hernández
El Jibarito

 

    One friend of mine from Dominican Republic told me a few years ago:  "If Puerto Rico doesn't change the political status now, I will see many of you Puerto Rico going in "yolas" (small boats) to Dominican Republic."  I hope, personally that these words are not prophetic, but as time goes by it seems to be so.  While the world is moving forward with globalization, including the integration of countries into economic blocks (Asian, American and European) and there is an increasing interdependency among sovereign nations, Puerto Rico is being isolated.

    Once, Puerto Rico was an economical model for other countries in America, and an example of relative prosperity.  Today, this is obviously not the case.  This is in part due to the fact that the Puerto Rican model for the economy was based on dependency on the United States, and it grew considerably, but it never developed.  The consequences for not developing Puerto Rican economy are beginning to be felt in the mid 1980's, and later in the 1990's the effects over the Puerto Rican economy were dramatic.  After 1989, and the fall of the Soviet Union, the United States began to create new policies towards the world to insert itself into the world economy.  There were some measures taken by the US that affects Puerto Rico.

    The US was aware that ever since the Cold War, many countries in Europe were opening free-trade with each other, leading to the Common European Market, until what is today the European Union, which formed the European economic block.  The US became aware also, a bit before the 1990's and afterwards, they became aware that Japan became a very important economic power.  Not only Japan, but also other countries became rich in Asia:  Singapore, Hong Kong, Taiwan, South Korea which came to be known as the "Four Tigers" of Asia.  Japan, along the Four Tigers of Asia, and countries like New Zealand and Malaysia, it became the Asian block.

    Since before the 1980's, the US had gradually opening free trade with Canada and some Latin American countries, specially in the area of the Caribbean, opening its free market with Mexico through NAFTA (North American Free Trade Agreement).  However, confronting itself with the reality of two economic powers as rivals, the Asian block and the European block, the United States also needs to consolidate its free market towards the rest of the American continent to be able to compete in the globalized world.   Therefore, by the year 2005, almost all the countries in the American Continent, will create the Free Trade Area of the Americas or FTAA for short (to visit its site click here).

    During these last few years there have been changes in several countries in Latin America:

(1)  First of all, we can see the adoption of the US dollar as the official currency in some of these countries in order to facilitate transactions between the United States and those countries and facilitate free market.   Examples of these countries are Argentina, Panama, and most recently, El Salvador.

(2)  Also, we have seen the sale of companies that previously belonged to the government to private corporations, in order to benefit those companies which were decapitalized and lost profits.

(3)  The opening of markets in South America.

(4)  Argentina and Brazil as becoming the most important economic powers in South America.

(5)  Recession in Argentina, a consequence of the sales of their telecommunications and increased corruption, and the intervention of the International Monetary Fund (IMF) in requiring the government of Argentina to insure the "sound" capitalist use of the loan to remedy their recession.  This would affect dramatically other countries that inter-depend with Argentina, like Paraguay, Uruguay and Brazil.

(6)  The timid but gradual opening of the US market to Cuba despite the embargo, and the adoption of Cuba of the US dollar as valid currency.  Cuba is also opening very much to European markets and businesses.

All of this is not happening by mere chance, this is just some of the steps which are being taken by those countries and by capitalistic forces in order to make possible the American economic block in the world in the future.

    The question we must ask is:   What role will Puerto Rico have in the FTAA under its current status quo?  The answer:  None.  In what way will this affect the Puerto Rican economy?  The answer implies an analysis of the way the economy of Puerto Rico has grown, how has not developed, and how the current status of colony or territory has been the main responsible for its failure during the 1980's and 1990's while the United States has been opening its economic frontiers with other countries of Latin America and the world.

 

The Growth of the Puerto Rican Economy

The Economy of Puerto Rico from 1900 to 1990

    In order to understand the problem of Puerto Rico's economy.  During the first four decades, the majority of the Puerto Rican economy was characterized by agriculture, specially sugar cane, tobacco and coffee.  Since 1898, after the invasion of the United States forces in Puerto Rico, US corporations bought enormous amounts of lands for this task.  During these years Puerto Rico was deeply submerged in misery and extreme poverty.  Puerto Rico was poorer than Haiti by then.  Theodore Roosevelt, Jr. who became governor of Puerto Rico in 1929, wrote:

I have seen mothers carrying babies who were little skeletons, I have watched in a class-room thin, pallid, little boys and girls trying to spur their brains to action when their little bodies were underfed.  I have seen them trying to study on one scanty meal a day, a meal of a few beans and some rice.  I have looked into kitchens of houses where a handful of beans and plantains were the fare for the entire family (Pérez 7).

    It was during this time, that the US began implementing important Federal programs in order to help poor families to survive the great depression.  This was done after President Roosevelt tried to carry out his New Deal, and the establishment of 1933 of the Federal Emergency Relief Administration, which had its counterpart in Puerto Rico in the Puerto Rican Emergency Relief Administration (PRERA).  Afterwards, in 1935, President Roosevelt created the Puerto Rican Reconstruction Administration (PRRA) which had as its task the social and economic reconstruction of Puerto Rico.  The PRRA accomplished the development of electrical lines in all the Island and increased the level of industrialization, made better health system, a re-forestation program, better education, and gave jobs to about 60,000 people .  Afterwards the PRRA and the PRERA disappeared completely (Dietz 163-176).  However, this was the beginning of the dependence of the Puerto Rican economy on Federal welfare, which became one of the most important components of the Puerto Rican economy.

    After World War II, the economy of Puerto Rico changed dramatically.  Under the leadership of Luis Muñoz Marín, and having Governor Rexford Guy Tugwell as sponsor, Puerto Rico carried out what was called Operation Bootstrap.  This program consisted in providing US corporations certain benefits in order for them to invest in Puerto Rico, attract capital, and create jobs which came to be developed throughout the years, specially using first Puerto Rican tax exemption to these corporations, and later, under Section 936 of the US Internal Revenue Code, also Federal tax exemptions.  During the 80's, the government of Puerto Rico also profited from what was called the "tollgate tax" in which Puerto Rico would retain 10% of the profits that were going to return to the US made by corporations investing under section 936.

     Evidently the infrastructure of the Island got significantly better, and Puerto Rico got industrialized.  During this process, people abandoned gradually agriculture and went to the urban areas.  Unfortunately there was limited amount of jobs available on the industry, and that's why the government wanted to establish a policy of emigration to the United States (Dietz 301-308).

     Not only the policy of migration helped to hide the fact that the economy of Puerto Rico wasn't developing, just growing, but also the continuous concessions by the Federal government of welfare and Federal funds to the state increased dramatically.  So much that by 1982 individuals received $2.9 billion (Dietz 317), by 1989 these were about $6 billion (these don't take into consideration Social Security and other acquired rights), and by 1999 it reached approximately $9 billion.  By that time in 1989 about 60% of the population fell under the official level poverty, and about 43% of the population depended solely on Federal welfare in order to live (Berríos 65;Weisman).  The level of unemployment in Puerto Rico during the 80's was about 19.5%.  However, taking into account that for this number only considers those who look for work, and not who those who can work but who are not looking for it, the real unemployment goes from 35 to 40%.  To imagine how great is this number we have to consider the fact that the average unemployment rate in the United States during the Great Depression was 20% (Berríos 65-66).

 

US Opening Markets During the 1980's and its Effects on Puerto Rican Economy in that Decade

    As José de Diego said:  "Puerto Rico forms part of the ball of the world."  To understand what happened to the economy here, we have to observe also what happened in Latin America during the 70's, and why the US opened its markets towards Latin American countries.  First of all, some countries of Latin America, through the General Agreement of Tax and Tariffs (GATT) had found some of their products entering free of tariffs in the United States.  However, events in Latin America made the United States reconsider its international policies, and also open more its economic borders to more Latin American products.

(1)    Some Latin American countries re-established commercial and diplomatic relations with Cuba, against the express will of the United States.

(2)    The continual defiance to American foreign policies by many of the regimes of Latin America, even of those considered allies of the United States.

(3)    Argentina and Brazil opposed for a long time its integration along with South Africa of the South Atlantic Organization Treaty.  Afterwards, Argentina didn't want to participate along with the United States' armed forces in order to confront the crisis of Central America.

(4)    The negative effect over North American transnationals, because of the policies adopted over foreign investment adopted by some Latin American countries.

(5)    The creation of the Latin American Economic System (LAES) and the opening of free market in South America in order to obtain more fiscal autonomy from the United States.

(6)    The anti-imperialist language adopted by some powerful Latin American organizations, like the Permanent Conference of Political Parties of Latin America (COPPPAL), specially in the 1984 Quito Treaty.

(7)    Four countries (El Salvador, Nicaragua, Honduras and Costa Rica) formed part of what they called "Grupo de Contadora" as an important political and diplomatic instrument before the United States, in order to provoke a pacific solution to the Central American conflicts.  In 1986, Argentina, Uruguay, Brazil and Peru joined the "Grupo de Contadora" (Gautier, Rivera and Alegría 14-16).

    In order to calm down the situation in Latin America, and in an effort to neutralize the hostility of certain sectors against the United States, President Ronald Reagan, in 1983, created what came to be known as the Caribbean Basin Initiative (CBI).  It consisted in conceding many countries and territories in the Caribbean region, free access to the United States market.   They were Aiguilles, Antigua and Barbuda, Holland's Antilles, Bahamas, Caiman Islands, Costa Rica, Dominica, El Salvador, Granada, Guatemala, Guyana, Haiti, Honduras, Jamaica, Montserrat, Nicaragua, Panama, Dominican Republic, Saint Kitts and Nevis, Saint Lucy, St. Vincent and Grenadines, Surinam, Trinidad and Tobago, Turkish and Cockish Islands, and the British Virgin Islands.  The CBI also provided about $350 millions in economic help to the Caribbean Basin.

    Ever since the United States' invaded Puerto Rico 1898, Puerto Rico had benefited from its free access to the United States'.  In fact after the Puerto Rican status of Commonwealth was established, the pro-Commonwealth party pointed this advantage of the Commonwealth over independent countries for Puerto Rico's free access to the US markets.  Apparently, since 1983 this was not true.  Now it seems that other independent countries had advantage also of having free access to the United States' market.

    This sole fact represented a serious problem to the Puerto Rican economy, one consequence was apparently positive and the other, negative.  Let's start first with the negative aspect.  Apparently, these countries, under the CBI would find an advantage over the Commonwealth of Puerto Rico, because the costs of their products would be cheaper than Puerto Rico's in the US market, so Puerto Rico would be unable to compete effectively, specially those produced in agriculture.  The good news was that Puerto Rico could use the funds obtained from the benefits of Section 936, in order to provide financial help to the Caribbean, and also the exportation of products made through 936 US corporations.  This made the economy of Puerto Rico to grow dramatically, thanks to the investments made by corporations under section 936.  Puerto Rico, with the use of the funds obtained from 936 corporations under the "Toll Gate Tax" would invest in "twin plants" which were subsidiaries of the industries established in Puerto Rico  (Gautier, Rivera and Alegría 124-136; Irizarry 233-236).

 

The Decline of Puerto Rican Economy and the Opening of the US to the Free Market

    In 1993, William Jefferson Clinton was elected President of the United States.  He inherited the recession of the United States' economy, which his predecessor, Pres. George Bush (father), couldn't solve.  His election represented hope to the people of the United States for the restoration of the economy.  This hope for the people of the United States, might represent bad news for Puerto Rico.  Why?

    Remember, that two of the basis of the economy of Puerto Rico are the US Federal funds and the exemption of Federal taxes to US corporations, specially under Section 936.  Clinton's new plan would represent a threat to the latter, and not without reason.  Economists in Puerto Rico saw it coming.  As early as 1983, 7 years after Section 936 was adopted as an incentive for the Puerto Rican economy, some Congressmen pointed out some abuses made by US corporations that invested under this section in Puerto Rico.  Instead of encouraging savings and the channeling of funds to productive activities, it rather focused on consumption and speculation.  Obviously, these Congressmen saw that Section 936 had not accomplished its purpose, and that the benefits to the rest of the Caribbean were very limited.  The Clinton administration wanted to correct this problem, however, if it was eliminated about 80,000 direct employments would be lost, along with other 70,000 indirect ones (Irizarry 235-36).

    In fact Bob Woodward reports a conversation of Bill Clinton with Senator Patrick Moynihan, who was the chairman of the Finance Committee in the Senate:

That evening, April 27 [of 1993], the Clintons invited Pat Moynihan and his wife Elisabeth to the White House for a private dinner.  Moynihan was not happy with the overall economic plan, and felt he had not been consulted enough about it.  In effect, the White House had just handed it to the House and Senate, saying, here, pass this.

    Moynihan wanted to introduce Clinton to sensitive real-world politics.  For example, there was one item in the economic plan that would have to be dropped, a proposal to eliminate the tax subsidy for U.S. corporations doing business in Puerto Rico.  Known by its title, section 936, the subsidy was, Moynihan granted, of course, indefensible.  One company received a tax break of about $500,000 per worker.  Some pharmaceutical firms got $150,000 per worker.

    But that wasn't the point.  Moynihan painted a doomsday scenario of what would happen if the tax credit were to be dropped.  First, American firms would pull out of Puerto Rico, causing the unemployment rate to double to about 30 percent and creating economic crisis.  A political crisis would follow.  Puerto Rico faced an upcoming plebiscite on statehood, and if the tax break were eliminated, the politicians could argue that it never would have happened if the territory had two US senators.  Statehood would then pass the plebiscite, Puerto Rico would apply for statehood, and Congress would of course reject the application.  In all, it would be a political nightmare.  How would the United States look in the world?  So the tax, which would save some $5 billion over four years, just couldn't be done, Moynihan said.  He could never let such a proposal out of the Finance Committee - for reasons, he noted, that couldn't be explained publicly (Woodward 198-99).

    Though Clinton promised to consider the point, he made legislation in 1993, in order to reduce the benefits of US corporations under Section 936 down to 50%, and since then the investments of US corporations have been reducing significantly over the years.   Later, in 1996 it was totally eliminated by the US Congress under a Republican majority with the signature of Pres. Clinton.  During this time, the amount of employments in manufacture was about 155,700 by 1996, but by 1999 it was reduced to 137,200, and by 2001 it was reduced to 136,300 employees.  During the first half of the year 2001, many manufacture industries announced permanent closings, layoffs and a decrease in operations.  The total loss of employments in the manufacture sector from November 1996 to 2001 was 24,900.  Because of the loss of the benefits of Section 936, the old industries that profited from this disposition began a period of "phase-out" that will extend until the year 2005 (Irizarry 239-241).

    At the same time all of this was happening, after 1994 the Republican dominated Congress wanted to direct itself to a neo-liberal philosophy of the economy.  This was reflected in the Republican program known popularly as the "Contract with America", and is further elaborated in a book published by Newt Gingrich called To Renew America.   According to this view, after the Cold War, it makes no sense to continue regulating the economy.  Rather the state must return to the role of facilitator of the welfare of the market, and let the market take care of the welfare of the US economy.  This meant the dismantlement of a great part of the welfare-state model, which meant the elimination with some Federal welfare benefits to individuals, the other pillar of the economy of Puerto Rico.

    There are two kinds of Federal funds being given to individuals.  The first one has to do with earned Federal benefits, which has to do with payments like Social Security, Medicare, Veteran benefits and pensions to formal Federal employees, which are earned as a result of contributions made to the United States.  Contrary to popular belief in Puerto Rico, earned benefits constitute the substantial majority of benefits received from the US Federal government.  Obviously these benefits are practically untouchable for Congress.

    However, there are other kinds of Federal benefits, like granted Federal benefits, which are often called in the US as welfare to individuals.  Some programs like funds for housing to individuals have been taken away from some Puerto Ricans or greatly reduced.  Others like those having to do with nutritional assistance programs were tied to certain conditions to those individuals, some of them having to do with having some kind of employment.  However, after the loss of employment in Puerto Rico, and the reduction of employees in the Puerto Rican government, it has been increasingly difficult to satisfy that condition.

    Meanwhile, the Neo-liberal view of the economy facilitated the expansion of free trade towards Mexico under the NAFTA, and also using the CBI, with the rest of the Caribbean.  Also, the US was trying to develop free trade with Argentina and Brazil.  As free trade has been expanding, Puerto Rico's economy was losing with respect to other countries which were previously poorer than Puerto Rico.   Here is an example, considering the Gross National Product (GNP) per capita in US$:

Comparative Table of Puerto Rico with Other Countries (GNP in US$)
Country GNP per capita 1970 GNP per capita 1980 GNP per capita 1995**
Argentina 3,533 3,996 8,498
Barbados 4,252 5,453 11,306
Chile 1,397 1,580 9,930
Cyprus *** 4,164 13,316
South Corea 967 1,953 11,594
Ireland 5,656 7,791 17,590
Malta 760 3,713 13,316
St. Kitts/Nevis *** 1,767 10,150
Singapore 950 5,907 22,604
Trinidad/Tobago 3,185 5,218 9,437
Venezuela 3,298 3,067 8,090
Puerto Rico 3,900 5,362 7,685

Source:  Puerto Rican Independentist Party, based on the Report of Human Development, of the United Nations
**Includes the Purchasing Power Parity
***Not available for that year.

We also have to see the most recent studies concerning the Gross Domestic Product (GDP) the situation is more dramatic. The difference between the GNP and the GDP is that the latter does not include the income accruing to a nation's residents from investments abroad minus the income earned in the domestic economy accruing to non-nationals from abroad.  Generally the difference between the GNP and the GDP is minimal in countries in which their production is based on internal sources of capital, but it is significant when they depend on external capital.  Other countries in the world, including those of Latin America are reaching Puerto Rico or have surpassed Puerto Rico also in the GDP.  Before, Puerto Rico had the highest GDP in Latin America, according to the following table, this doesn't seem to be the case anymore:

Gross Domestic Product per capita (in US $)

Countries 1950 1960 1970 1980 1990 1997
United States 1,907 2,838 4,933 11,889 21,827 30,347
Japan 309 860 2,835 7,809 17,625 29,928
Hong Kong *** *** 1,607 6,556 17,431 23,670
Singapore *** 470 1,193 5,271 14,384 22,074
Spain 418 883 2,211 5,728 11,765 13,849
Ireland 580 933 1,907 4,934 11,273 21,859
Trinidad/Tobago 675 1,588 2,278 9,562 8,989 9,571
Mexico 489 798 1,481 4,757 6,896 7,393
Venezuela 740 1,265 1,785 5,741 6,859 8,950
Puerto Rico 343 716 1,726 3,475 6,156 8,513
Argentina 886 1,261 2,090 5,049 5,532 7,428
Chile 530 837 1,436 3,080 5,279 8,422

Source:  Irizarry 276, using data from the World Bank
***not available data

    As we can see here, the traditional Puerto Rican economic model is failing compared to the economies of those countries in the world that are even smaller than Puerto Rico, but which are now richer than Puerto Rico.  Also, countries like Barbados, Mexico, Venezuela, Argentina (despite its problems) and others, are now in a far better position with respect to Puerto Rico.

    Most of the US capital invested by US companies in Puerto Rico under Section 936 are planning to move now to Singapore, Ireland, Mexico, and other places in the world that provide better incentives.  In the case of Mexico, we should point out that President Fox is now looking to attract high tech industries to be established in Mexico, this implies that Mexico could provide better incentives to attract industries now established in Puerto Rico.  Evidently, Puerto Rico doesn't have the means right now in order to keep them established there.  The competition between Latin American countries become evident, and the incapacity of Puerto Rico to be able to compete against other countries is a sign that it should change its current political status quo of territory of the US.

 

The Mysterious Endorsement of Puerto Rican Government to NAFTA

    This is the reason why the endorsement to NAFTA made by governor of Puerto Rico from 1993 to 2000, Pedro Rosselló, was not exactly understood, since a free market with Mexico would affect the Puerto Rican economy.  David Martin, explains:

Governor Rossello's enthusiastic endorsement, and work for the passage of, the North American Free Trade Agreement (NAFTA) was a big mystery to many economists and business people in Puerto Rico. When the Caribbean Basin Initiative (CBI) had first been proposed by the Reagan administration they recognized that the concerns of Puerto Rico might be a problem. They sent a large delegation down to smooth any possible ruffled feathers and eventually put in a provision to assure that the island lost none of its rum excise tax because of new Caribbean competition. But the CBI was no danger to Puerto Rico at all compared to the NAFTA. Both eliminated quotas and duties on imports for the favored countries, but virtually the only industries in which the quotas and duties make a significant difference are the low-wage industries of apparel and footwear. The CBI made an exception for those industries and kept their restrictions in place. The NAFTA did not.

Clearly, the industries most endangered by NAFTA-enhanced Mexican competition would be the low-wage industries of apparel and footwear. Puerto Rico, as it happens, with the lowest wages in the country, also has a higher percentage of its manufacturing work force in apparel than any state. A governor loudly speaking up for Puerto Rico's clear economic interests and opposing the NAFTA, as close a thing as its passage was, could have at least gained leverage for some kind of compensation for the damage the NAFTA was certain to do to Puerto Rico. It made no sense that the governor would throw that leverage away and turn cheerleader for the NAFTA right off the bat.

But then, too, it does not seem to make a lot of sense that a Republican Congressional leadership would conspire in the crafting of unprecedented legislation heavily tilted toward making Puerto Rico, with its poverty, its heavy welfare dependency, its statist liberal-Democratic leanings, and its different language and culture, a state. It is also puzzling that the national news organs who did not stint on their coverage--all favorable--of the NAFTA, would hardly report at all on legislation concerning another southern, Spanish-speaking neighbor that is of much greater consequence for the future of the nation (Martin).

Also, the Government of Pedro Rosselló initially defended Section 936, but then he completely changed its mind and wanted it eliminated.  There is a reason for that.  During those years of Rosselló's administration, he worked very hard through the Resident Commissioner Carlos Romero Barceló, to make possible a Congressional sponsored plebiscite.  Also, they knew that Section 936 would be a serious obstacle to statehood, because if Puerto Rico ever became a state of the Union, Section 936 would be eliminated, as well as many other economic advantages of Puerto Rico.  Since, the US wanted to establish free market with Mexico, and Section 936 was practically against the neo-liberal free-market philosophy, they sponsored NAFTA and were against Section 936.  However, the bill for a Congressional sponsored plebiscite failed miserably, showing how much Congress doesn't want to offer Puerto Rico the option of becoming a state of the Union.  For all practical purposes, President Clinton and the Republican Congress used the pro-statehood ideology of Puerto Ricans for the United States' own purposes and interests, and not those of Puerto Rico.  The pro-statehood leaders of Puerto Rico lost the cake and the opportunity to eat it.

 

Alternatives to the Current Economy of Puerto Rico

The Pro-Statehood Party Alternative to the Economy

    The New Progressist Party (NPP), which promotes statehood for Puerto Rico, after the elimination of Section 936, proposed the use of a remnant of Section 936, which was called Section 30-A.which provides the benefit of "wage credit".  Under this section, the US Corporations established in Puerto Rico would receive credit for the total of wages that it pays to the employees.  This, they say, would create incentives for more employment in Puerto Rico.

    The problem with the NPP proposal is that this party is not exactly aware of all the changes happening in the US and its economic foreign relations.  As I have stated, the Neo-liberal view of the economy is the one dominating Congress.  It is the market, and not the intervention of the state, that is going to determine the welfare of the US economy.  Free market implies that there won't be any kind of economic frontiers between countries, and during the FTAA there won't be economic frontiers among the vast majority of the countries in the American Continent.  This also implies no special benefits to any countries or territories in particular.  Section 936 and 30-A provided special benefits to Puerto Rico, however, in a free market world this will no longer be the case.  The NPP obviously wants to create a political issue with the present government of Puerto Rico under the administration of Gov. Sila Calderón, blaming her for not defending Section 30-A.  Reality is that the one to blame for this is the US Congress, not the administration of Calderón.   Like Section 936, Section 30-A will disappear in the year 2005, just when the FTAA will be concretized in the American Continent.

 

Pro-Commonwealth Alternative

    Since the year 2001, when the administration of Gov. Sila Calderón began, she has proposed to defend in Congress, through the Resident Commissioner, an amendment to Section 956 of the Internal Revenue Code, in which they practically tries to reproduce the benefits that Section 936 used to provide.  Though Section 956 concerns only to foreign countries to the US, the Governor wishes to include an amendment to that Section in order for certain benefits to be applied to US territories, like Puerto Rico.  Under this amendment, it excludes current US tax 90% of the otherwise taxable investments in US territories made by a Qualified Corporation out of its qualified income; as a result, companies can elect an 85% dividends received deduction for dividends paid out of Qualified income.

The Bill builds upon the provisions of the Code generally applicable to Controlled Foreign Corporations (CFC's) and is intended to enable Puerto Rico to maintain, and over time strengthen, its economic base. It will also benefit the United States by encouraging U.S. companies doing business in the possessions through CFC's to invest their earnings in the United States when those earnings are not currently needed for operations within the possessions. As under generally applicable U. S. tax principles, the tax-deferred income of possessions CFC would, like all other CFC's, remain subject to U.S. tax when ultimately repatriated as a dividend. Presently, there are over $1.3 billion in expansions under negotiations with companies planning to operate as CFC's (Cantero).

    Regrettably this proposal also suffers from the same problem the NPP has when defending Section 30-A.  In the present free market, under a Neo-liberal philosophy of Congress, it will not concede Puerto Rico "special benefits".  Either Puerto Rico will survive free-market under the rules of the market or it won't.  The failure of the proposals made by Calderón's administration is not due to the situation in Vieques, like many people seem to suggest.  Congress won't concede it anyway, with or without the Navy being in Vieques.  Free market, not the Navy in Vieques, determines the rules under which Puerto Rico 's economy will prosper or not.

 

The Alternative Proposed by the Pro-Independence Movement

    The pro-independence movement, specially represented by the Puerto Rican Independentist Party (PIP) seems to be a sector which, along with those who propose free sovereign association with the United States, seems to see some proposals that integrate Puerto Rico to all the benefits it would obtain from the global market.  In fact, from the three parties' sites, it seems to be the only one that has a page on the FTAA (click here to see the page).

    One of the proposals of the PIP is plenty consistent with the current status, but neither the NPP nor the pro-Commonwealth sector wish to carry out, because for the effect of the Internal Revenue Code, Puerto Rico would be treated as a foreign nation.  Section 901 of the Internal Revenue Code proposes that any US Corporation that pays taxes to a certain country, then the US would credit the amount paid over the profits that would turn back to the US from that country.  This is due to avoid double taxation (taxation in the country in question and taxation in the US).  For example, if a company has a profit of $10,000,000.00, then Puerto Rico would tax it $3,500,000.00 so that this same amount will be credited in the US so the company doesn't have to pay it when the profits go back to the US.  This is usually called "foreign tax credit".

    This as such is not an incentive.  However, PIP proposes to legislate in the creation of a vigorous incentive program that will consist in providing one or more combinations of subsidies that could be applied to all companies (without regarding if they are US, domestic, or from other countries) that in the long-run would compensate the taxation made by Puerto Rico over the profits of those US companies.  This will definitely reproduce the benefits that Puerto Rico had under Section 936, or better.   Countries like Singapore, South Korea and Ireland have used exactly this strategy in order to be able to attract US companies to invest in there (Negrón 323-358).

    The difference between this and the other two proposals is that this one is precisely one of the means used in the international market in order to compete and attract investments and capital from the United States.  However, this sole proposal, as the PIP recognizes, will not be enough in order to succeed in the globalized world.  We need the political powers of a sovereign state in order to make treaties with other countries of the world and be able to attract capital from dozens of countries.  Some countries which are members of the European Union and Japan invest in other countries just like in the US.  Even these treaties would provide Puerto Rico with what is called informally in English as "tax-sparing", in which they would spare from tax some or all profits made from companies of those countries.

    Also, Puerto Rico needs to free itself from the yoke of exporting its products in US ships which are the most expensive in the world, and doesn't let us compete adequately in the free market with countries which can contract other ships which are up to 30% to 40% cheaper than US ships.

    The suggestion of independence or free association, for Puerto Rico appears to be sound compared to the other status options.  Puerto Rico would still be able to use the US dollar as its official currency under independence, like in the case of Argentina, Panama and El Salvador.  Also, Puerto Rican citizens would have free entrance to the US and vice-versa, free flow of citizens would mean free flow of capital among both countries.  Puerto Rico would also form part of international organizations such as the American States Organization, the Caribbean States Association and the World Trade Organization; could open free trade with the European Union as Dominican Republic has done.  The potential for its geographical position can also be exploited in order for Puerto Rico to be able to establish free trade in the Americas and with Europe.  Because of the historic link to the United States, Puerto Rico would be able to effectively serve as the means by which the United States to relate better to Latin America.

    Independence would provide the freedom to be able to manage and develop the economy in the world of the free-market and globalization.  There is nothing that Commonwealth or Statehood can do that independence or free-association wouldn't do better under these circumstances.

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Works Cited

Berríos Martínez, Rubén.  Puerto Rico:  Nacionalidad y plebiscito.  Puerto Rico:  Editorial Libertad, 1993.

Cantero Frau, Ramón.  Evolving Environment.  New Economic Vision 956.  July 13, 2002.   <http://www.pridco.com/4.1.1sedc_point_view956.html>. 

Dietz, James L.  Historia económica de Puerto Rico.  Trans Yvette Torres Rivera. 1989.  PR:  Ediciones Huracán, 1992. [English Orig.  Economic History of Puerto Rico:  Institutional Challenge and Capitalist Development.  Princeton University Press, 1986].

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