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Creating A Climate Business Can Warm To: Puerto Rico Is Eager To Use Its Finely Balanced Political Relationship With The US To Spur Its Economy And Attract A New League Of Overseas Manufacturers
By NANCY DUNNE
February 6, 2004
Palm trees and about two dozen exhibitors talking on cell phones lined the graceful walkway outside San Juan's Caribe Hilton Conference Centre last week. Inside, representatives of 130 suppliers were networking, hoping for a piece of Puerto Rico's burgeoning pharmaceutical and biotechnology business.
John Knapp, of Allegheny Surface Technology, was talking up his company's stainless steel finishing technology for sanitary equipment. "Every major pharmaceutical company has opened here," he said. "This is a huge market."
As a US territory, Puerto Rico has been drawing foreign investment since it began offering big tax benefits in the 1940s. Although geographically a tiny footprint in the global economy, the island's fortunes in many ways mirror the economic restructuring under way on the US mainland.
What is absent, however, is the bitter political debate over trade and outsourcing. For more than half a century, Puerto Rico has been successfully selling itself as "a manufacturing paradise" and has been, itself, the beneficiary of offshore production practices.
The island's economy reflects the strengths and weaknesses of development built around low-cost manufacturing. It also offers lessons on the benefits - both to its own economy and that of the mainland - of outsourcing.
History and preference have created in Puerto Rico an entity that is both American and not, a sort of political Minotaur. Its people are US citizens but cannot vote in national elections. They serve in great numbers in the US armed forces; abide by US laws and safety standards; receive infusions of cash from US domestic programmes, such as health and education funding; but pay no federal taxes.
Puerto Rico was once a sugar republic, dependent on weather and volatile market conditions. Even that great optimist, Franklin D. Roosevelt, called the economy hopeless. After the second world war, half the population fled to the mainland, prompting Washington to grant tax benefits to turn the island's economy around and stem the exodus.
The perennial debate here is not trade but statehood versus territorial status quo. In a choice between political representation in Washington and advantages in economic development, Puerto Ricans have chosen the latter.
And why not? Status quo has much to offer, particularly to mainland businesses: a corporate income tax rate of 2 to 7 per cent (compared with 35 per cent in the US); special tax-free trade zones; US legal and intellectual property protection; along with lovely weather and modern infrastructure.
Relative to Latin America, Puerto Rico has prospered. Although the official poverty rate is about 40 per cent, much higher than the poorest US states, the underground economy, paternalistic government and extended-family culture means very few go hungry or homeless. Income per capita rose from Dollars 150 in 1940 to Dollars 16,065 in 2000. During the same period, life expectancy increased from 46 years to 79, a bit above the US average.
As on the US mainland, the economy has morphed from labour-intensive light manufacturing in the 1950s to capital-intensive heavy industry through the 1970s, before making a transition to high technology and services today. It has attracted its own migrant population, mostly from the Dominican Republic.
Puerto Rico has been courted for its generous tax regime and relatively low-cost workforce. But it was spurned when technology enabled the flight of textile plants and other labour-intensive operations to economies offering cheaper labour. US law requires manufacturers to pay the US minimum wage in Puerto Rico.
Despite the loss of thousands of low-skilled manufacturing jobs, there is no talk on the island of import protection and no railing against US tax loopholes, which allegedly encourage companies to move production abroad.
Hiram Ramirez, head of the island's economic development department, stressed Puerto Rico's resilience and its "ability to deal with difficult problems with a very open economy".
He said: "We are accustomed to change, accustomed to dealing with harsh situations and coming out on top. It is something Puerto Rico has been doing for 50 years.
High-tech manufacturing remains the key to the economy. Factories still dot the entire island. In 2002, manufacturing generated Dollars 29.9bn, or 42.2 per cent of gross domestic product, and employed almost 12 per cent of the commonwealth's workers. Facing the fact that low-wage jobs will continue to leave, the development overseers have launched a "second economic transformation", converting the island into a manufacturing centre for pharmaceuticals and medical devices.
According to the island's Pharmaceutical Industry Association, 19 companies with 37 manufacturing operations are producing 37 per cent of US medications. AmGen, Abbot Laboratories and Eli Lilly are building big biotechnology facilities, worth an estimated Dollars 1.6bn. The US drugs suppliers who swarmed to the trade exhibit were drawn by the island's proximity to the aging mainland market and the presence of US regulatory agencies.
The revenues earned during Puerto Rico's boom years were poured into education. Ninety-five college campuses on the island are churning out a high portion of science and engineering graduates. University fees are relatively low and, because incomes are below those of the mainland, most students qualify for US government loans and grants.
Unemployment over the years has been heading down from an estimated 40 per cent before industrialisation to about 12 per cent last year. According to Fernando Lugo-Camacho, deputy executive director of the Puerto Rico Industrial Development company, the island has weathered its worst crises - first, the loss in 1996 of some of its tax incentives and, second, the 2001 terrorist strikes and prolonged US recession, which punched the tourist trade hard.
Although pharmaceutical and biotechnology sectors lack the entrepreneurial ferment and creativity under way in the US, Puerto Rico has been attracting more research and development. "We have to be very aware of competition and must improve any advantages we can offer to bring production here," said Mr Lugo.
And what does this do for the mainland economy? One exhibitor, Joe Wolfgang of Sympatec, which makes systems for particle technology, had part of the answer. Healthcare is bound to get cheaper with technological efficiencies and lower labour costs, he said. "If you have better technology making earlier diagnoses, you can identify diseases earlier. You will be able to treat them at lower costs."