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SUN SENTINEL
A Political Island, Puerto Rico Enjoys Economic Links
to United States
by Doreen Hemlock
January 24, 1999
©Copyright 1999 KRTBN Knight Ridder Tribune Business News
SAN JUAN, Puerto Rico --When Hurricane Georges slammed the
Dominican Republic and Haiti last fall, those cash-strapped nations
foundered, anxious for financial help from abroad.
But when Georges pounded the bustling U.S. commonwealth of Puerto
Rico , the economy instead got a short-term boost. So many billions
of dollars flowed from the federal government and U.S. insurance
companies that construction boomed. Stores sold TVs, appliances
and home furnishings fast. Factories rebounded. Virtually all
hotels reopened in time for the Christmas season.
While Puerto Ricans remain split over whether they want to become
a U.S. state, their island's speedy recovery from Hurricane Georges
shows a paradox: When it comes to the economy, Puerto Rico is
practically a state already.
Integration into the U.S. system -- including the use of the U.S.
dollar, U.S. interest rates and U.S. bond markets -- helps keep
Puerto Rico 's economy humming along with 3 percent annual growth,
while many nations in Latin America and the Caribbean now struggle
to grow at all.
And that integration also is a key reason that Puerto Rico consistently
ranks among the top business partners for Florida, with multibillion-dollar
trade yearly and major operations for such diverse companies as
Miami-based fast-food chain Burger King and Boca Raton-based alarm
system maker Sensormatic Electronics.
"We operate in Puerto Rico just as in any part of the United
States," said a spokeswoman for American Airlines, the dominant
carrier to the island. "Differences in requirements are like
those between Miami or Dallas or San Francisco."
The resemblance to the United States is obvious right from the
airport.
Ramps for the disabled, as required by U.S. law. Federally funded
expressways and highway signs. Miami-style traffic. But the similarities
go far deeper:
-- In retail, U.S.-style malls abound. Puerto Rico has the highest
density of Burger Kings worldwide. It hosts the world's largest
J.C. Penney, spanning 350,000 square feet, and will soon host
the first Macy's outside the continental United States. Sears
at Plaza Las Americas mall in the San Juan area sells more than
any other Sears store in the world.
-- In finance, Puerto Rico sells its government bonds on the
U.S. municipal bond market, with buyers eligible for exemptions
from federal, state and local taxes. Credit ratings have remained
stable despite financial turmoil that has hit hard at Latin America
and the Caribbean since late 1997.
-- In real estate, housing sales are booming -- as in the 50
states, thanks to rock-bottom interest rates on mortgages, often
backed by federal government programs such as Fannie Mae.
It's little surprise then that Puerto Rico has been enjoying the
fruits of the longest peacetime economic expansion in U.S. history.
The island "has mirrored the U.S. economic turnaround since
1991," noted Standard & Poor's. The credit rating agency
assigned an "A" rating for Puerto Rico to issue $4 billion
in municipal bonds last month.
To be sure, the island known in the 1940s as "the poorhouse
of the Caribbean" still has far to go economically to reach
the level of the average U.S. state. Per-capita income today is
about $8000 a year, about half the level of Mississippi, the poorest
state. Unemployment is about 13 percent, historically low for
Puerto Rico -- but more than twice the U.S. average. And growth
rates similar to U.S. levels are not sufficient for Puerto Rico's
economy to reach the income levels of average states.
"The private sector is clear that 3 percent growth is
not good enough," said William Riefkohl, executive director
of the Puerto Rico Manufacturers Association. "There are
some economies in Latin America that have been growing faster
than us, like Argentina. And 3 percent won't close the gap with
the U.S."
Early this decade, few analysts would have predicted today's smooth
sailing for the commonwealth of 3.8 million residents -- or for
the U.S. economy, for that matter.
Three years ago, when the U.S. government still posted budget
deficits, Congress decided to phase out tax breaks for U.S. manufacturers
in Puerto Rico -- part of a plan to raise new tax revenue and
curb what some called "corporate welfare." Many analysts
predicted doom for Puerto Rico 's manufacturing-based economy.
The phase-out has undeniably hurt. Manufacturing is Puerto Rico's
lifeblood, accounting for about 40 percent of the economy -- a
bigger share than in the United States or most European nations.
Puerto Rico is home to operations for most of the world's major
pharmaceutical companies, producing about half the prescription
drugs sold in the States -- including the infamous, sex-enhancing
Viagra made in Pfizer's plant in Barceloneta.
But without federal tax breaks, few new manufacturers are setting
up factories in Puerto Rico today, opting instead for lower-wage
sites such as Mexico or tax havens near European markets, such
as Ireland. Some factories have closed amid global competition,
including Motorola's 1,500-worker pager plant in Vega Baja. And
while some companies are expanding -- drug maker Searle, for example,
is investing $200 million to boost facilities -- that growth cannot
offset manufacturing losses.
Overall, manufacturing employment in Puerto Rico dropped by more
than 7,000 jobs in the 12-month period ended October, to 140,000
jobs. Most losses were in apparel and electronics assembly, in
line with trends on the U.S. mainland, island officials said.
Still, the administration led by Gov. Pedro Rossello has been
able to keep the economy growing, partly through massive public
works, including the $300 million Superaqueduct water pipeline
and $1 billion-plus Urban Train project, both under way. Spending
on roads and other infrastructure rose 70 percent to $1.7 billion
during Rossello's first term that ended in 1997, said Carlos Vivoni,
secretary for economic development.
Much of the financing came from the U.S. sources -- both from
federal grants and loans and from sales on U.S. bond markets.
The government also offered new programs to boost and diversify
the economy, including expanded local tax breaks for factories,
tax cuts for companies that go public on U.S. stock markets and
more promotions to attract hotel developers.
"The big question is whether the government can continue
to invest in public works at the rate it's been, until the new
incentives and new policies kick in," said economist Joaquin
Villamil, president of economic consulting firm Estudios Tecnicos
in San Juan. "I'm optimistic it can."
Hurricane Georges offered an unexpected boost to the government-backed
construction effort. The Sept. 21 storm -- the worst to hit Puerto
Rico in 70 years -- caused more than $3 billion in damage and
lost production. It destroyed or seriously damaged about 50,000
homes, or 4 percent of total housing, government officials said.
Now, the Rossello administration proposes to offer incentives
for private companies to build up to 50,000 homes on land that
the Puerto Rico government would donate, tapping federal funds
for the five-year project -- as states would, Vivoni said.
Long term, Rossello and others in his pro- statehood party
dream of a day when Puerto Rico would not just resemble a state
economically --but actually be the 51st star on the U.S. flag.
"Statehood is a development tool," claimed economic
czar Vivoni. "It's not just because we'd get more federal
funds. It's for the perception of stability that comes with being
a state. Statehood would mean even more business and investment."
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