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War And Economy Dominated Federal Agenda In 2003

Hostilities in Iraq, Vieques, Section 956 debacle, federal budget, Ferre’s death top federal affairs news


December 25, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

The year that started with a bang ended with a bang. On March 20, President Bush and coalition forces launched a massive attack on Saddam Hussein’s regime of terror. Two weeks ago, U.S. forces captured the dictator.

Against the backdrop of the military conflict in Iraq, the U.S. Navy pulled out of Vieques, the amendment to Internal Revenue Code Section 956 sank, the U.S. and Puerto Rico economies rebounded, and don Luis A. Ferre died.

Interestingly, CARIBBEAN BUSINESS had reported in its Feb. 20 issue that economic recovery would follow the war with Iraq. What has happened to the U.S. economy this year is analogous to events during World War II. Both wars helped to lift the nation’s struggling economy. In 2001, there was negative economic growth. In 2002, the U.S. economy grew little. This year, however, it grew at a robust 4.7%, according to one source.

This is primarily because military spending is up; companies have had to upgrade or replace industrial machinery; the health sector continues to grow as it must respond to the needs of an aging population; stock prices are up; petroleum prices are down; and interest rates remain at their lowest levels in half a century. Once the first phase of the attack on Iraq was over, the decrease in uncertainty galvanized consumer spending, which is now fueling the economies of the island and the U.S. mainland. This has been further stimulated by tax-induced increases in disposable income.

The end of the initial attacks in the war had a more modest impact on Puerto Rico’s economy. In February, Economic Development & Commerce Secretary Milton Segarra said the war in Iraq could reduce growth from a projected 3% to 0%. However, the island’s economy grew in fiscal year (FY) 2003 (ended June 30) at a rate of 1.9%, compared with -0.3% in FY 2002, and surpassed the $68 billion gross domestic product peak of 2001.

Ironically, the military conflict in Iraq coincided with the U.S. Navy’s departure from Vieques on May 1, after 60 years of live-bombing training on the island municipality. The cleanup of the island is expected to cost at least $1 million, and an additional $2.3 million has been set aside for the Department of the Interior to use in the protection and conservation of the former bombing range.

The immediate economic fallout of these developments was the announcement that Naval Station Roosevelt Roads in Ceiba, the largest in the world, would be shut down by early 2004. Already, at least 30% of the base’s staff have departed, which has significantly hurt a number of municipalities—real-estate markets in the area are down; service contractors and suppliers are scaling down operations; and there is greater concern over security.

It is estimated the Navy’s departure will amount to a $1 billion-a-year loss to the Puerto Rican economy. On the positive side, proposals are being prepared for the development of the 8,600 acres involved. The chief proposal would turn the land into the much-discussed Port of the Americas transshipment port.

This year was a big disappointment for the Calderon administration because it was unable to persuade the U.S. Congress to adopt an amendment to Section 956 of the Internal Revenue Code. Hailed by the governor as a vital economic component, it was designed to reverse the consequences of the dismantling of Section 936 and would have turned U.S. corporations based here into Controlled Foreign Corporations (CFCs), paying little or no federal income taxes on revenue generated in Puerto Rico. The Joint Committee on Taxation perceived this as a sleight of hand, which would cost the U.S. Treasury at least $11.3 billion over 11 years plus another $21 billion over 10 years.

Despite this setback, the Puerto Rico Planning Board expects the local economy to grow up to 2.9% next year, thanks in part to the hefty contribution of federal funds, which in FY 2003 amounted to one-third of the island’s budget. Next year’s consolidated budget is expected to be even larger, with billions of dollars going to food assistance, infrastructure ($20 million for the Urban Train), and education.

Given that 2004 is an election year, much of what Puerto Rico will get in federal assistance will depend on how effectively it can ride on federal legislation. It should be noted that Federal Reserve Chairman Alan Greenspan has criticized President Bush for overspending, which could result in a $500 billion deficit next year.

Finally, Puerto Rico bid farewell to former Gov. Luis A. Ferre, the last great Puerto Rican statesman of the 20th century. Ferre participated in drafting the Commonwealth of Puerto Rico Constitution and founded the New Progressive Party. He was also an accomplished musician and the most significant philanthropist in 20th-century Puerto Rico. Until his death just shy of his 100th birthday, Ferre remained one of the most influential Puerto Rican politicians, especially in Republican circles, where he was widely known as Mr. Republican from Puerto Rico. Former President George H.W. Bush’s visit to honor him posthumously in Puerto Rico was a testament to that fact.

This Caribbean Business article appears courtesy of Casiano Communications.
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