The 1947 industrial program known as Operación “Manos a la Obra,” or Operation Bootstrap, marked the beginning of a new stage of industrial planning based on external capital and tax exemptions. The origin of the program was the Ley de Incentivos Industriales (Industrial Incentives Act), passed that same year, based on exemption from the federal taxes that already existed in Puerto Rico under Article 9 of the Jones Act. In addition, Section 931 of the US Internal Revenue Code had already provided for exemption from federal taxes for corporations operating in US territories, such as Puerto Rico, until the time they repatriated their earnings to the States.
Puerto Rico entered into a period of rapid industrialization and strong economic growth. This period of prosperity lasted for two decades, but it had adverse consequences. The changes produced by the dizzying pace of modernization also provoked unfavorable social effects, such as a drop in the size of the labor force, a decline in agriculture, and a rising wave of immigration. The prosperity came to an end in the mid 1970s, and since then Puerto Rico has not been able to return to the strong economic growth it experienced in that period. This is a subject that is still pertinent today since our economy is still based on the principles established under Operation Bootstrap.
The background of Operation Bootstrap
The economic policy of the 1940s was for there to be “una industrialización criolla” (criollo or locally-based industrialization). The industrial plan of the period reflected the influence of the New Deal in the United States in its high degree of governmental intervention in the economy. That led to the creation of local enterprises to foster local production through a strategy of import substitution. The industrial plan of the 1940s was also to be seen in the agrarian reform that sought to break the control of the great agricultural corporations over the agriculture of Puerto Rico and put the land into the hands of local people. In general, the objectives of the plan reflected the populist policies of the Popular Democratic Party (PDP), then in power, since they emphasized growth and efficiency as well as social justice.
However, the implementation of Operation Bootstrap in 1947 produced a dramatic change in industrial strategy, from populist criollo industrialization to “laissez faire” capitalism, with an emphasis on investment from abroad. One important reason that explains the change in the economic policy was the end of World War II and its negative impact on the local economy. After growing sharply at rate of 17% annually from 1940 to 1945, Puerto Rico’s per capita income dropped in the postwar period. Per capita income fell from $270 in 1945 to $256 in 1948. An important factor in explaining the economic contraction was that the government could not continue to finance its populist policies. After the war, as the US liquor industry recovered, the government budget was affected due to the decrease in sales of Puerto Rican rum on the mainland. The tariffs on sales of rum on the mainland were an important part of the Puerto Rico budget.
Another reason for the change in direction of the industrial program was that the strategy of promoting criollo industrialization through the creation of state enterprises in the cement, bottling, brick and shoe industries was not successful, particularly when faced with the competition from US imports after the end of the war. The war had created an opportunity for these enterprises at a time when the normal flow of supplies from US competitors had been interrupted.
Other experts, such as James Dietz, hold a different view. Dietz argues that the reasons were more political than economic and were based on the fact that the PDP was under political pressure to sell such enterprises to avoid the uncomfortable position of being an employer and also supporting the new, private capital program. Given the large profits of the cement company, these enterprises were lucrative. Another political reason that could explain the change was that, in the United States, the populism of President Franklin D. Roosevelt was then looked upon with suspicion due to the Cold War with the Soviet Union. The change in Puerto Rico’s industrial policy could also be explained as a result of the opportunity that arose after the war: large amounts of capital had been accumulated in the US, and those funds were seeking attractive opportunities for investment. The government of Puerto Rico seized the opportunity and offered an attractive place to invest.
What the Industrial Incentives Act did was to take advantage of the existing codes and add exemptions of all kinds for companies that invested in new industries in Puerto Rico for an initial period of 10 years, which was later extended to 25 years. In addition to these tax incentives, the government of Puerto Rico aggressively marketed other qualities that would be attractive to investors from abroad. These included cheap labor, access to an open US market, a stable political climate, and low infrastructural costs given the government subsidies. This new industrialization strategy entailed political changes. The Popular Democratic Party abandoned the ideal of independence and accepted autonomy as the solution to the political status of Puerto Rico.
Two stages of development
The industrialization process under Operation Bootstrap took place in two stages. The first lasted from 1947 to 1965 and was characterized by the attraction of companies that were highly labor intensive and came to Puerto Rico for the wages that were low in comparison with the United States. In 1950, for example, the daily wage in Puerto Rico was 28 percent of that of the United States. The sectors that experienced the greatest investment during the first stage were textiles, clothing and leather goods.
In the decade of the 1960s, the model based on attracting investment by companies that were very labor intensive stopped working. One of the problems was the decline of the local textile industry as a result of the increase in the minimum wage in Puerto Rico at the beginning of the decade. The increase reflected the pressure exerted by US labor unions that believed the low salaries in Puerto Rico constituted dangerous competition for jobs on the mainland. Another factor was the change in tariff policies of the United States, which favored the importing of European textiles. All in all, this is a good example of one of the greatest weaknesses of our development program: dependence on US economic, trade and tax policies without having any sort of influence over them.
At the beginning of the 1960s, the second stage of industrial development began, this one based on attracting companies that were highly capital intensive. The new strategy was based on the premise that capital intensive industries would provide higher salaries and would stimulate the creation of secondary industries. Until that time, the labor intensive industries that had been attracted by Puerto Rico’s low wages had developed very few secondary industries. These functioned in ways similar to the first Mexican maquiladoras, or cross-border plants, in the sense that they imported raw material and semi-manufactured products, and then exported products to which only a small increase in value had been added locally. The principal local component was the cost of labor. The new strategy sought to bring companies whose capital intensive character would provide an incentive for the creation of other, secondary industries, and so increase the value added locally to exported products. This objective was never achieved, because the companies that came to Puerto Rico were subsidiaries of multinationals with established networks of companies that supplied them and handled distribution for them.
To attract these new, highly capital intensive companies, a new Industrial Incentives Act was passed in 1963. These regulations increased the period of exemptions to 17 years for companies that located in areas considered to be industrially underdeveloped. The promotion of highly capital intensive companies had a positive impact, and Puerto Rico became an important center for the petrochemical and pharmaceutical industries. The petrochemical industry, specifically, was the most important sector under the new policy. It grew 27.2 percent per year from 1959 to 1974, and at the beginning of the decade of the 1970s provided 27 percent of Puerto Rico’s net manufacturing income.
The principal achievement of Operation Bootstrap was the fulfillment of its objectives of rapid industrialization and economic growth. Evidence that there was industrialization in Puerto Rico was that the agricultural sector declined from 18 percent of the Gross National Product (GNP) in 1950 to 3.6 percent in 1980. At the same time, manufacturing increased its share of the economy from 16 percent in 1950 to 48.1 percent in 1980.
Other changes produced by industrialization included the growth of the financial and governmental sectors. The financial sector grew from 10 percent of GNP in 1950 to 14.4 percent in 1980. This growth reflects the greater liquidity of the economy produced by foreign funds deposited in the financial sector, particularly after Section 936 was passed in 1976.
The governmental sector grew from 10 percent of GNP in 1950 to 17.1 percent in 1980. The proportion of government jobs grew faster, as in 1950 it employed only 7.6 the labor force. However, by 1980, it had become the largest employer with 24.4 percent of the jobs in Puerto Rico.
The growth of the GNP in the 1950s was 5.3 percent in real terms (adjusted for inflation) and it rose to 7 percent in the following decade. That was accompanied by an impressive growth in the per capita GNP, which grew from $154 in 1940 to $342 in 1950, and to $716 in 1960. By 1980, it had risen to $3,479, more than most of the countries in Latin America.
Along with the increase in income, we find an important increase in the average hourly wage, from $.42, or 28 percent of the US level, in 1950 to $.94, or 41 percent in 1960, and $2.59, or 59 percent, in 1975. Another piece of data that reflects the prosperity of the period is the growth in the investment rate. It increased from 15 percent in 1950, to 21.2 percent in 1960, and it reached a historical peak of 30.5 percent in 1972.
The rapid economic growth of Puerto Rico in the 1950s and 1960s made it a model of progress and planned development for the Caribbean and Latin America.
Although the statistics of the unprecedented growth during the 1950s and 1960s suggest that those were times of great prosperity, it is important to recognize that the rapid industrialization of the country also produced significant social dislocation. Some of the most instructive social indicators were the effect it had on job creation and the size of the labor force.
Surprisingly, as a result of rapid economic growth during the 1950s and 1960s, there was a moderate decrease in the unemployment rate in Puerto Rico. It began at 12.9 percent in 1950, rose slightly to 13.3 percent in 1960, and declined again to 10.3 percent in 1970. However, the increase of 3 percent in unemployment achieved in the two decades between 1950 and 1970 is equal to that obtained in a single decade with the criollo industrialization plan between 1940 and 1950.
At the same time, the size of the labor force declined consistently during the life of the program. From a level of 53.1 percent in 1950, it fell to 45.4 percent in 1960 and remained stable until the mid 1970s. That is, in the midst of a period of growth that was unprecedented in our history, fewer people were in the labor force. Another important point that adds a great deal to the social profile of the period was the large wave of immigration spurred by the PDP, which resulted in a million Puerto Ricans leaving the island between 1945 and 1970.
All together, this is confirmation that the new economic model did clearly generate growth but not jobs. The new jobs created in manufacturing did not adequately compensate the loss of jobs in agriculture due to the decline of sugar, coffee, and tobacco.
The data on the size of the labor force and immigration are significant because they help us to see the Operation Bootstrap program in a different light. In a quantitative study of these trends, economist James Dietz shows us that if the net rate of migration had been half of what it was, or if the size of the labor force had remained stable, the unemployment rate would have reached 16.2 percent in the 1950s and between 25 and 26 percent in the 1970s.
The creation of an informal economy, seen in the reduced size of the labor force, and migration were two important social escape valves during that period of supposed prosperity. The new jobs in the manufacturing sector did not compensate for the losses in the agricultural sector. That produced large economic and social disruption in rural Puerto Rico, which had experienced the decline of the traditional sugar, coffee, and tobacco industries.
The industrialization plan also had positive social aspects. There was a decrease in the mortality rate, which led to a rise in life expectancy from 46 years in 1940 to 73 years in 1980. The literacy rate rose from 68.5 percent in 1940 to 91.3 percent by the mid 1970s. Also reflecting the economic prosperity of the two previous decades, 80 percent of Puerto Rican families owned their own homes in the mid 1970s.
Author: Maria Elena Carrión
Published: September 15, 2014.
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