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The Star-Ledger Newark, NJ

A Commonwealth Wonders If The Wealth Will Ever Return


October 27, 2002
Copyright © 2002 The Star-Ledger Newark, NJ. All rights reserved. 

Las Piedras - When Luis Raul Flecha drives his muddy old truck through the west end of this weather-beaten town, he gazes through barbed wire at a former life.

There, vast and silent behind a high-security fence, stands the vacant Intel plant where he worked until a year ago as a quality inspector for computer hardware, earning $7.90 an hour to help support his mother, his diabetic father and his two unemployed brothers.

Not far away, along potholed streets dotted with empty storefronts, he passes the abandoned quarters of three other former employers: Wang, Micom Caribe and Integral Data Systems.

Today, after four jobs and four plant closures, Flecha has been forced to turn his back on nearly 20 years of experience on high-tech assembly lines - the only work he ever wanted.

He drags his new workplace around on a trailer hitch behind his truck: a lunch cart, outfitted with a chicken roaster and a warmer for fresh empanadillas. "I worked with computers," the 38-year-old former technician says. "Now I sell chickens. I would like to go back to my old life, but I don't know if it's possible. Will there ever be jobs like that again?"


Fifty years after Puerto Rico became a U.S. commonwealth, that question hangs like a storm cloud over this Caribbean island of 3.8 million people. Decades of steady economic gains have stalled, creating an atmosphere of uncertainty and frustration.

Forty-eight percent of the population lives below the federal poverty line, and unemployment hovers at 13 percent, according to the 2000 Census. Per capita income is $8,185, about half that of Mississippi, the poorest U.S. state.

The once-thriving manufacturing sector, which transformed Puerto Rico from a backwater sugar plantation a half-century ago into a modern industrial center, has lost 28,000 jobs since 1996, when Congress began phasing out tax breaks that made the island a haven for overseas investors. After outstripping most of the 50 states in manufacturing growth for many years, Puerto Rico has fallen to dead last.

"What you see now is that the world has changed, and Puerto Rico has not changed with it," says Jose Villamil, who is president of the Chamber of Commerce of Puerto Rico and chairman of the island's fourth-largest bank. "We have been seriously deficient in long-term planning and it has hurt us."

The effects are often hard to see behind the tropical facades most tourists encounter at sun-splashed resorts like the Caribe Hilton in San Juan, or along nature trails in the lush rain forest known as El Yunque.

But behind the travel brochure images, there is another Puerto Rico, one that lies hidden in urban slums, zinc-roofed rural huts and sprawling squatters' colonies like the Punta Diamante section of Ponce, the island's second-largest city.

In Las Piedras, a fast-growing factory town until the late 1990s, "For Sale" signs hang in the broken windows of many downtown shops. Skeletal dogs roam the streets. The rear door of the municipal library is still scarred where vandals broke in last month to steal two computers.

The departure of Intel and other factories in the past two years has reduced the municipal tax base by 30 percent, from $10 million to $7 million, limiting the government's ability to provide services for the town's 34,485 residents.

"It is very hard for us," says Luis A. Diaz Algarin, a special assistant to the mayor. "All you have to do is look around. This is not the same place that it was."

The frustrations in Las Piedras, as in so many other towns, have as much to do with Puerto Rico's past successes as they do with today's problems.

"When you are used to things getting better," Algarin says, "it is hard to accept failure, especially when the future is so unclear."


Throughout much of the 20th century, the story of Puerto Rico was one of remarkable progress, beginning with the New Deal policies of President Franklin D. Roosevelt in the 1930s.

At the time, Puerto Rico was an agricultural society in crisis. The sugar cane business, long a mainstay of the island's economy, was withering. For a nation of campesinos , there was little work in the fields. Faced with widespread poverty and disease, the government built roads, houses, schools and health clinics, and established public enterprises in the glass, pulp and paper, clay and shoe leather industries. Government spending, fueled by a massive infusion of federal dollars, grew until the public sector provided work for 32 percent of the population.

By the end of the decade, however, the challenges facing the island were still enormous. In 1939, average per-capita income was $113, less than one-sixth of the average in the United States, which took control of Puerto Rico in the Spanish-American War of 1898 and later, in 1952, granted the island commonwealth status. .

More than 30 percent of the population in 1939 worked on the island's struggling farms, while only 7 percent of workers held better-paying manufacturing jobs. More than two-thirds of the population of nearly 2 million lived in rural poverty, where fewer than one in four homes had running water. Life expectancy was 46 years.

In 1947, officials in Washington and San Juan adopted a new strategy, dubbed "Operation Bootstrap," which privatized the main state-run industries and provided tax breaks designed to lure overseas investors.

"The goal was to go from the collapsing sugar economy to industrialization," says James L. Dietz, an economist at California State University in Fullerton who has written several books on Puerto Rico. "Richer countries could provide the investment funds and the momentum for growth."

The impact was immediate. U.S. companies flocked to Puerto Rico by the hundreds, and the center of island life shifted from the countryside to the city. Income and other measures of well-being increased dramatically.

Like many other Puerto Ricans who lived through that era, Luis Soto Lopez, a 71-year-old retiree from the northern town of Arecibo, talks with a kind of reverence about the years after World War II.

"There was work, and more work, and the pay was good," he says. "Someone who worked in a tobacco-curing plant for about 5 cents an hour could make two or three times more working in the needle factories. There was a sense of hope."

By 1970, per capita income had risen to $1,857, compared with $5,050 in the United States. By the mid-1970s, according to economist Iris Jimenez de Ramirez, more than 70 percent of homes had indoor plumbing, and more than 99 percent had television sets. Life expectancy topped 70 years.

Puerto Rico became a model for success, held up by officials in Washington as an example for other developing economies. Throughout the 1970s, they touted the "industrialization-by-invitation" strategy that had remade the island.


At the same time, however, rising wages were beginning to price Puerto Rico out of the market for labor-intensive industries like textiles and leather making, and jobs in those areas started to shift to poorer areas in Latin America and Asia.

After an abortive effort to move into petrochemicals, island officials responded by focusing on more sophisticated industries, such as electronics and pharmaceuticals. They received a big boost in 1976, when Congress amended Section 936 of the U.S. tax code to provide the biggest incentives yet for outside investors.

The arrangement provided a windfall for U.S. businesses. In 1986, American corporations reaped more profits from operations in Puerto Rico than from Canada or Britain, both of which had much larger economies and a higher volume of U.S. investment.

By the mid-1990s, however, the tax breaks were depriving the U.S. Treasury of an estimated $3.5 billion in revenue, and Congress decided to phase out the Section 936 exemptions.

Since then, the island has struggled. The manufacturing sector has bled jobs and the overall economy has grown by an anemic 2 percent a year. After years of matching success stories with the likes of Malaysia and Singapore, Puerto Rico suddenly found it difficult to compete with emerging nations like China and Chile.

A sense of malaise has slowly crept into daily life. Gloria Antunez, an eighth-grade teacher in the San Juan public school system, says that even among her brighter students there is concern about the future.

"Many factories have closed, and more and more people are working for minimum wage if they are working at all," she says. "But the cost of living keeps going up, and kids are not stupid. They realize things may not be better for them than for their parents." As a result, many of the best-educated young workers are migrating to the mainland to find better jobs. Although this is not a new phenomenon - in fact, half of the nearly 8 million people who identify themselves as Puerto Rican live in the 50 states - it has accelerated in recent years, educators and students say. Gloria Velazquez, a 21-year-old graduate of the University of Puerto Rico in San Juan, says she wants desperately to stay near home. "But I dont know what is out there for me," she says. "Do I want to sell hamburgers? No. I think a lot about New York or Chicago."


Government officials in San Juan acknowledge the economic mood has dimmed, but argue that the island is undergoing a shift toward high-tech industry and local entrepreneurship that will leave Puerto Rico stronger in the near future. "We have had tough times, challenging times," says Ramon Cantero Frau, the secretary of economic development and commerce. "We lost the (Section) 936 tax breaks, we lost tourism after 9/11, and we have suffered from political corruption and poor management. But I think the worst is over." The pharmaceutical industry has provided one bright spot in the otherwise bleak manufacturing sector. Abbott Laboratories, Amgen Inc., Baxter International Corp., Bristol-Myers Squibb Co., Eli Lilly & Co., Johnson & Johnson and Metronics have all announced expansions or openings in recent months. Drug manufacturers on the island produce 15 of the 20 top-selling prescription drugs in America, including Xanax, Percocet and Halcion. After decades of providing cheap labor for overseas corporations, Puerto Rico is also taking small steps toward expanding local ownership and control. One example is the fledgling effort to transform U.S.-run plants on the verge of closing into employee owned ventures. This extension of the islands long-cherished cooperative movement has already allowed workers at half a dozen facilities to become shareholders in their own future. In Comerio, nestled in the valley of the Rio Plata about 20 miles southwest of San Juan, nearly 500 workers at a brassiere manufacturing plant lost their jobs earlier this year when the owner, Playtex, decided to move its operations elsewhere. But one of the industrial engineers at the plant, Ricardo Reyes, persuaded 25 co-workers to contribute $2,000 each to buy the factory and keep it running. Today, the rechristened Nueva Horizante cooperative employs 160 people, with plans to expand. "It was a catastrophe for Comerio when Playtex announced the closing," Reyes says. "But we decided to treat it as an opportunity, and so far it has turned out very well." Former workers have begun similar ventures across the island - at Coami in Isabela, Creacion de la Montana in Utuado, Hanes in Camuy, Orocovena Biscuit in Orocovis, Pan-Am Shoes in Hatillo and Transworld Plastics in Sabana Grande. "The concept of the industrial cooperative is still fairly new, but it is important," says Mildred Santiago, the sub-administrator of Fomento Cooperativo, the government agency that helps promote employee ownership across Puerto Rico. "After years of control by foreign companies, local control represents real progress." For those who are unable to help themselves at the moment, the administration of Gov. Sila Calderon has embarked on a mission to address the worst elements of poverty on the island. Last month, Calderon announced a $1 billion program designed to build homes and roads and to improve health, education and utilities in 686 communities. The program is one of the first in Puerto Rico to use local rather than federal funds. But island officials have made it clear that turning the local economy around will also require help from Washington.


Most urgently, Puerto Ricos political leaders are lobbying Congress to amend Section 956 of the federal tax code to replace the incentives for investment that were lost when lawmakers phased out the provisions of Section 936. Under this plan, U.S. companies that keep assets overseas to avoid high capital gains taxes at home would be allowed to repatriate profits at a reduced rate by investing in Puerto Rico. "At the moment, these companies are paying no taxes to the U.S. Treasury on these assets," says Mari Carmen Aponte, executive director of the Puerto Rico Federal Affairs Administration. "If Section 956 is amended, some of those assets will shift to Puerto Rico, and the government will benefit." Puerto Rican officials are also seeking to repeal a portion of the 1917 Jones Act that requires maritime trade to be carried on U.S. flagships. The law stands in the way of a proposed deep-water port on the islands southern shores that would allow foreign mega-vessels to stop and shift cargo to ships small enough to pass through the Panama Canal. Hector Jimenez Guarba, director of the Port of the Americas project, says the facility could pump $6 billion into the island economy and produce 10,000 new jobs over the next decade, by tapping into the cargo flow between Europe and Latin America. "There is real potential for us to become a hub for shipping in the region, and that could do wonders for our economy," Guarba says. But the promise of such plans, and the small steps toward local ownership that have begun to alter the landscape in Puerto Rico ever so slightly, are lost on the vast majority of island residents, who see only the depressing effects of plant closings and rising unemployment. For Luis Raul Flecha, any talk of improvement in the island economy has the sound of a cruel joke. Since he was laid off by Intel in April last year, numerous job interviews have led nowhere. His mother has helped support him, as well as his father and two brothers, on her minimum-wage salary as a municipal janitor. "Do you know how humiliating that is?" he asks. '


Even Flechas decision to go into the lunch business is risky. To get started, he had to spend $2,000 on a cart and cooking equipment, and $1,385 more on a Honda generator. At best, he hopes to make between $300 and $350 a week in profits. "Its a gamble," he says. "But I dont know what else to do." Each night, after the rest of his family is asleep, he keeps himself busy at the desktop computer he received when he worked at Intel. Working at the keyboard, he says, reminds him of better days. Lately, he has been tinkering with a graphics program, designing the house that he always dreamed he would build. It is a small, single-story structure, with a partial brick facade and a pink birdbath in the front yard. "Isnt that nice?" he asks with a sigh. "I would like to live in that place someday."

First Of Three Parts

Next Week: Puerto Rico And New Jersey: Chasing Jobs In Jersey, With Hearts Left Behind

In Two Weeks: Diverted By The Great Debate - Should Island Join Union Or Flee? Observers Say Neither Is An Economic Cure-All

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