The first is flawed by the fact that tourism accounts for no more than 6%-7% of gross national product, while manufacturing accounts for over 42%. The second is flawed by the extent to which Puerto Rico has sought to train its workforce up to levels where they are an attractive resource for international, and of course, largely American companies. These companies have come to the island in droves, and now employ, directly and indirectly, some 400,000 people. So many Puerto Ricans have jobs on their doorstep and have no need to flee to the big city.

In fact, economists claim that Puerto Rico has one of the most dynamic economies in the Caribbean region. American firms have invested heavily there since the 1950s, replacing the once powerful sugar industry as the major employer, and Puerto Rico’s exports and imports have prospered, nearly doubling between 1987 and 1997. These firms have been encouraged by the island’s duty free access to the US and by tax incentives.

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The result of this surge of economic activity is a gross domestic product which reached $74.4bn in 2003, with GDP per head of population amounting to no less than $19,220. The island is an important exporter of manufactured merchandise goods – primarily, of course, to the US. To see how far the island has changed from its agrarian origins in sugar, government figures show that manufacturing accounts for 42.1% of the economy and employs 11% of the workforce. Agriculture on the other hand has slumped back to 0.3% of GDP and employs 2%.

Economy aligned with US

Puerto Rico’s economy fluctuates largely in line with the US economy, so some recent strengthening of the US economy has fed through to a relatively buoyant Puerto Rico. The island’s GDP is expected to grow 3.3% in 2004 and 2.8% in 2005, and 2.4% over the medium term – between 2006 and 2010. Private consumption has increased in line with low interest rates although unemployment remains high, averaging 12.1% in 2003 – though it had fallen back to 10.8% by May 2004. Puerto Rico’s foreign trade surplus at the end of 2003 stood at $13.8bn, but high oil prices in 2004 do not bode well for prices on the island as it is heavily dependent on oil imports to meet its domestic energy needs, particularly for electricity generation.

The eventual development of the Port of the Americas is critical to Puerto Rico’s commercial development. By 2006, this highly sophisticated port is expected to be ready to receive marine cargo for shipment to the Caribbean, south America, central America, the US and Europe. Despite optimism surrounding the Port of the Americas, the government has yet to implement fully a massive infrastructure programme which has been held back by bureaucratic red tape over the last two years.

Tax incentives for US mainland companies and Federal US transfers have been a critical factor in the island’s industrial development, but these started to be wound down in 1993, when the US cut the Section 936 tax exemption for US companies. The US introduced legislation to replace it with a more modest tax credit linked to wages paid by those companies in Puerto Rico rather than to profits.

Some 100,000 Puerto Ricans are estimated to be employed by companies operating under Section 936, of which 23,000 are in pharmaceuticals, and another 200,000 are indirectly employed. The last stage of the phasing out of Section 936 was begun in 1998 and the US government proposed that the existing Section 30A of the tax code be made permanent to provide an estimated $417m a year in tax incentives. This would compensate for the phasing out of Section 936. Section 30A allows companies to claim 60% of wages and capital investment as allowances against tax. New firms can incorporate themselves in Puerto Rico as ‘controlled foreign corporations’ (CFCs) and receive the tax benefits provided by Section 901 of the US Internal Revenue Code. Puerto Rico’s government aims to make up for the 936 loss by providing new local incentives, cutting taxes and encouraging economic development in other industries.

Unique tax advantages

The island’s government stresses its self-sufficiency. According to Hiram Ramirez-Rangel, executive director of the Puerto Rico Industrial Development Company, “Puerto Rico’s unique political relationship to the US allows us to provide tax advantages. But over time, taxes are less important. Operational advantages are growing to be much more significant. We have a value proposition which outlasts any change in the relationship between Puerto Rico and the US.”

The agreement between the US, Canada and Mexico for the North American Free Trade Agreement (NAFTA) has implications for Puerto Rico because of competition for jobs and investment. Although wage levels are lower in Mexico, Section 30A gives US companies in Puerto Rico an advantage in pharmaceuticals and hi-tech industries. In low-skill labour-intensive manufacturing, such as clothing and footwear, Mexico has the advantage. Puerto Rico currently employs 30,000 in the clothing industry.

The prospects for Puerto Rico’s economic development look strong, but they need to be qualified by its internal limitations. One economist comments that the economy was ‘somewhat fictitious’ as Puerto Rico has very few natural resources of economic value and its economy relies mainly on Federal Aid from the US government.

Tourist industry

Puerto Rico’s important industries include pharmaceuticals, electronics, textiles, petrochemicals, processed foods, clothing, and textiles. Sugar production has lost out to dairy production and other livestock products as the main source of income in the agricultural sector. Tourism has traditionally been an important source of income for the island, with nearly 3.9 million tourists visiting it in 1993. Tourism accounts for 7% of the island’s GNP and the tourism industry employs over 60,000 people.

Puerto Rico has a financial sector which is said, by local government agencies, to be ‘under-banked’ and provides opportunities for foreign investment. There are currently 19 commercial banks, and these include Banco Popular, the largest banking institution in the island, with over 100 branches there. Puerto Rico has branches of Citibank and FirstBank as well as Spanish banks BBV and Argentaria. The government owns and operates two specialised banks – the Government Development Bank (GDB) and the Economic Development Bank (EDB). Puerto Rico’s US connection means that banks are insured by the Federal Deposit Insurance Corporation and are subject to the same US controls applicable to banks on the American mainland.

The combination of sun, sea and economic dynamism marks Puerto Rico out from most of its neighbours. Developing both parts of the economy in tandem, without the one damaging the other, is its greatest challenge.