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Commonwealth vs. Independent Countries: How Does Puerto Ricos Economy Measure Up?
By CARLOS MARQUEZ
September 2, 2004
The option of independence as a political-status alternative for Puerto Rico has received very little support or votes since commonwealth began in 1952. Yet, during the latter half of the 20th century, there has been a proliferation of countries worldwide that have become independent nations. Membership to the United Nations more than tripled from 51 in 1945 to 191 in 2002. Many are small nations with economic performances that differ greatly, and few have done well or performed economically better than Puerto Rico has over the past 50 years. The great majority of these newly formed small nations havent done well economically.
Some of the new independent nations benefited from the impressive expansion of the global economy from 1950 to 2000, growing significantly despite their small scale. Nevertheless, others such as Sao Tome & Principe, Comoros, the Solomon Islands, Bhutan, and Equatorial Guinea remain extremely poor, with a gross domestic product (GDP) per capita ranging from $280 to $700 a year, wrote Richard Cooper of Harvard University in a paper presented at the World Banks Annual Bank Conference on Development Economics in May 2004.
The economic growth and success that took place during the second half of the 20th century wasnt evenly distributed. In the 1950s, world per capita income increased by 2.8%; in the 1960s, it grew to 3%; in the 1970s, it declined to 1.9%; and during the 1980s, it dropped even further to 1.3%, then increased slightly to 1.5% in the 1990s. The per capita income in the U.S., however, has increased by an annual average of 2.2% in the past 50 years. During that same period, Western Europes growth averaged 2.7%, while Asias was somewhat higher at 3.4%; Latin Americas growth was 1.7%, slightly higher than Africas 1%.
Puerto Ricos economic growth during the 1950s and 1960s wasnt an isolated case. The whole world was growing, although Puerto Rico was doing so at a faster rateas a result of industrialization and trade with the U.S.according to respected economic historian Angus Maddison.
A glance at Latin America, the Caribbean
According to the World Bank, the per capita gross income (GNI) of Latin America and the Caribbean in 2003 was about $7,080 (purchasing power parity dollars). This amount is less than half of Puerto Ricos per capita GNI of $16,320 and less than one-fifth of the States $37,500.
Gross national income (GNI) is the same as gross national product (GNP). The term was recently adopted by the World Bank to replace GNP.
Within Latin America and the Caribbeanwhich includes some of the largest developing economies, such as Brazil and Mexico, and some of the smallest, including Haiti and the Dominican Republica great inequality in terms of wealth distribution persists. Approximately 25% of the population in the region lives in extreme poverty (defined as living on less than $2 a day), and 50 million of those, or 9.5%, of the population in severe poverty (living on less than $1 a day), according to the World Bank. Modest growth returned to the regions in 2003, when the GDP increased by an average 1.3 %, after a contraction of 0.6 % in 2002, according to the World Bank.
Argentina continued recovering rapidly after its acute financial crisis. A series of external shocks, including the Brazilian crisis and the rise of the U.S. dollar against most currencies, combined with a high public debt that was hard to service and declining industrial activity to contribute to Argentinas economic crisis. The Andean countries performed well, with Chile, Colombia, and Peru recording growth above 3%. Ongoing political uncertainties, however, caused Venezuelas economy to deteriorate further during the first half of 2003.
In 2003, Central America grew by an average 3.1%, and it looks set to sustain that growth, thanks to the recently signed U.S.-Central American Free Trade Agreement (Cafta) and continued improvement in workers remittances from the U.S. as their economies recover.
The Latin America and Caribbean region has benefited from workers outside their respective countries sending currency back to their country of origin. In 2003, they sent a record $38 billion in remittances to their families. Workers in the U.S. were the biggest contributors, sending $31 billion according to a report prepared for the Inter-American Development Bank. These remittances are higher than the foreign direct investment in the region and the official financial aid. With these remittances, the U.S. has indirectly been contributing to the development of these independent nations and to their citizens well-being. According to Donald Terry, who heads the Multilateral Investment Fund of the International Monetary Fund (IMF), the actual numbers (remittances) are probably somewhat higher.
The Caribbean lagged in the recovery seen in the region as a whole. The Dominican Republic experienced a crisis in the banking sector, while in Jamaica, the extensive debt hampered growth. In August 2004, the IMF warned about Jamaicas "very high level of public debt and the associated vulnerabilities of the economy, exacerbated by the high degree of indexation of the debt to exchange rates and short-term interest rates."
Political instability in Haiti escalated into a full political and humanitarian crisis early in the year. The situation becomes worse in countries such as Honduras, Guyana, Nicaragua, and Bolivia, which are not only poor but also heavily in debt, according to the World Bank.
"Closing the Gap in Education & Technology," a World Bank study published in 2003, indicates that many Latin American and Caribbean countries suffer from a knowledge and technology gap. As a healthy investment climate is linked to a countrys capability to mobilize skills, technology, and innovation to increase productivity, economic performance prospects in most countries in the region dont seem too promising unless major advances are made to close this gap.
Comparisons with commonwealth
With an estimated per capita gross national income (GNI) of $16,320 (PPP) in 2003, Puerto Rico was ranked by the World Bank as having the 52nd-highest GNI in the world. PPP is an international dollar that has purchasing-power parity in a local economy with the U.S. dollar.
Argentina and Chile were closer to Puerto Rico than any other Latin American nation, but even then, Argentina, with $10,920, and Chile, with $9,810, had just 67% and 60%, respectively, of Puerto Ricos per capita GNI. These countries were followed in the ranking by Costa Rica, with $9,040, and Mexico, with $8,950. Even Brazil, the largest country in Latin America, ranked No. 86, with a per capita GNI of $7,480. Oil-rich Venezuela ranked No. 124, with $4,740, less than 30% of Puerto Ricos per capita GNI.
In the Caribbean, only the small economies of the British territories of Bermuda and the Cayman Islands, with populations of 65,000 and 43,000, respectively, reported higher per capita GNI than Puerto Rico, according to World Bank statistics. Supporters of Puerto Ricos independence emphasize that the nations of the Bahamas and Barbados have achieved per capita GNI somewhat similar to that of Puerto Rico. However, the circumstances of these countries are entirely different from Puerto Ricos. The Bahamas and Barbados have small populations of close to 300,000 each, which is less than 10% of Puerto Ricos almost four million, and their economies are also relatively small compared with Puerto Ricos.
Steady growth in tourism receipts and a boom in the construction of new hotels, resorts, and housing have contributed to the Bahamas economic growth. Its geographical location, less than 50 miles from the Florida coast, has been instrumental to the Bahamas achieving a per capita income of $16,140.
The Bahamian economy is heavily dependent on tourism and offshore banking, both promoted greatly by its proximity to the U.S. Tourism alone accounts for more than 60% of the economy, and 75% of all tax revenues are provided by the tourism sector, which directly or indirectly employs half of the labor force of about 150,000, a little over 10% of Puerto Ricos almost 1.4 million. Manufacturing and agriculture together contribute approximately a tenth of the Bahamian economy and show little growth, despite government incentives aimed at those sectors. Overall growth prospects rest heavily on the fortunes of the tourism sector, which in turn depends on growth in the U.S., the source of most of the visitors.
Like the Bahamas, Barbados has a relatively small population; therefore, the total countrys economic output doesnt need to be very large to have a positive impact on the economic well-being of the population. Barbados has benefited from the governments efforts to develop the tourism sector, offshore banking, informatics, and privatization. Even relatively small investments in the Barbadian economy go a long way toward improving the peoples economic conditions, contrary to Puerto Rico. Barbados has a total labor force of less than 140,000, or just slightly more than 10% of Puerto Ricos.
With an average per capita GNI of $7,080 (PPP) in Latin America and the Caribbean in 2003, the region has less than half of Puerto Ricos per capita GNI. The commonwealth, even with its inadequate economic performance, has been able to widen the gap between its per capita GNI and the average in Latin American and Caribbean countries, including Mexico and Costa Rica. In 1975, Puerto Ricos per capita GNI was $2,650 (PPP), only 30% higher than the average in Latin American and Caribbean countries of $2,040 (PPP). By 2003, the difference had increased to over 100%. Nevertheless, there are some exceptions. Chile, for example, has recently not only been able to keep pace with Puerto Rico but has been closing the per capita income gap.
Chile, slightly smaller than twice the size of Montana and with a population of almost 16 million, four times that of Puerto Rico, implemented sound economic policies in the 1980s, which it has maintained since. These policies have contributed to steady growth and have helped to secure the countrys commitment to a democratic and representative government. Chile has increasingly assumed regional and international leadership roles befitting its status as a stable, democratic nation. A three-year-old Marxist government was overthrown in 1973 by a dictatorial military regime led by Augusto Pinochet, who ruled until a democratically elected president was installed in 1990.
In 1975, Chiles per capita GNI of $1,270 was 48% of Puerto Ricos $2,650. It was still around 50% in 1985, after which the gap started to narrow; in 2000, the gap had closed to almost 59%. In 1975, Chiles per capita GNI was 17% of the States; by 2003, it had increased to 26%, according to World Bank statistics.
The U.S. and Chile concluded negotiations on a bilateral free-trade agreement (FTA) in December 2002. The FTA, which went into effect on Jan. 1, 2004, immediately eliminates tariffs on 87% of bilateral trade and will establish duty-free trade on all products within a maximum of 12 years. The advantage of being part of the U.S. market that Puerto Rico has had over its Latin American neighbors since becoming a U.S. territory is disappearing as these countries gain free access to the same market.
On Aug. 5, the Dominican Republic joined five Central American nations in Cafta. Although Puerto Rico still maintains a considerable positive per capita income gap with all of them, this agreement will contribute to reducing Puerto Ricos competitive advantage in relation to free trade access to the U.S. market. The additional integration of these and other Latin American and Caribbean economies with the U.S. should propitiate their economic convergence with Puerto Rico and the U.S.
Although Puerto Rico is still way ahead of most of the small independent countries that arose around the world during the second part of the 20th century, and of many that had previously gained their independence, a few examples are cited when Puerto Ricos potential economic performance is discussed to illustrate what independence could represent for the island. Among these are Singapore, Ireland, and Israel.
Singapore, which with 267 square miles is 7.6% the size of Puerto Rico, was founded as a British trading colony in 1819. It joined the Malaysian Federation in 1963 but separated two years later and became independent. Singapore subsequently became one of the worlds most prosperous countries, with strong international trading links and one of the worlds busiest ports. During the early years following its independence, Singapore benefited from the generally prosperous world economic situation in the mid-1960s. Trade with Japan and the U.S. increased substantially, with Singapore becoming a supply center for the U.S. during the Vietnam War.
Singapores population of 4.3 million is comparable to Puerto Ricos almost four million. In 1960, Singapores GNI of $669 million was 39% of the commonwealths $1.7 billion. By 1980, they were approximately even, at $11 billion each; and by 1990, Singapores was $16 billion bigger. In 2002, the difference was over $40 billion. On a per capita basis, Puerto Ricos GNI in 1975 was larger than Singapores $2,470 (PPP) by $180; in 2000, Singapores $23,780 exceeded the commonwealths $15,130 by $8,650.
Singapore established six principal economic development policies that contributed to the growth of its economy. These are investment in an efficient and transparent government; active promotion and acquisition of foreign direct investment; creation of a pro-business environment, specifically a favorable tax system; promotion of free trade; introduction of a tight monetary policy; and encouragement of high savings to build local capital.
Singapore has a diversified economy. Electronics, chemicals, financial services, oil-drilling equipment, petroleum refining, rubber processing and products, processed food and beverages, ship repair, offshore-platform construction, life sciences, and trade are the countrys main industrial sectors. Manufacturing accounts for approximately 25% of Singapores GDP, while services account for 70%. Electronics manufacturing makes up half of Singapores total production. In 2003, the countrys unemployment rate was 4.7%.
Singapore has an excellent infrastructure and is well served by air, sea, and telecommunications connections. One of the worlds busiest ports, Singapore is the hub and transshipment port for the Asian Peninsula countries of Indonesia, Malaysia, Thailand, Cambodia, Vietnam, and southern China, connecting about 400 shipping lines to more than 700 ports worldwide. Singapore doesnt only have outstanding seaport facilities; Singapore Changi Airport is a leading air hub, recognized worldwide for its efficiency. Its quality infrastructure, skilled work force, and excellent service in cargo handling have won high acclaim from users. There is also an 83-kilometer mass-transit system with 48 stations, complemented by a cargo rail service.
Singapore also is well-plugged-into the international financial system. It is the fourth-largest foreign exchange trading center in the world, the fifth-largest trader in derivatives, and the ninth-largest offshore lending center. The Singapore Exchange is recognized as a leading stock market in Asia and one of the worlds leading derivatives exchanges.
This economic success hasnt come cheap, however. Although not a one-party political system, the government has been virtually under the total control of the Peoples Action Party. The administration, led by Lee Kuan Yew from when the country achieved independence in 1965 until 1990, when Goh Chok Tong was elected prime minister, hasnt hesitated to stop the rise of any effective opposition.
Holding a monopoly on power and opportunity in a small country, the party could easily co-opt the willing and suppress dissidents. The traditional basesstudents and labor organizationsof opposition groups in the past were tightly circumscribed. Control of the broadcast media was in the hands of the government, and economic pressures were applied to any newspapers that became too critical, according to a Library of Congress study of Singapore.
For too long, the governments leadership has held the paternalistic view that only those who had brought the nation through the perilous years after independence could be trusted to make the decisions that would keep Singapore on the narrow path of stability and prosperity. The majority of Singaporeans scarcely dissented from this view. Singapore Inc., as some observers refer to the country, has spent all its history under the same management or successors handpicked according to a meritocratic system.
When Puerto Rico is compared with small independent countries in Europe, Ireland is almost always mentioned. Ireland isnt a newly independent country; it gained its independence from the United Kingdom in 1921 and withdrew from the British Commonwealth in 1948. In 1970, almost 50 years after the country achieved independence, Irelands GNI of $4.5 billion was lower than Puerto Ricos $4.7 billion.
Ireland, which competes with Puerto Rico for industrial investment, established the Ireland Investment Development Agency (IDA), an organization that works as a one-stop shop for investors. The IDA uses a selective process to attract foreign investors, particularly investments from pharmaceutical, medical devices, and biotechnology corporations. Ireland offers the lowest corporation tax rate in Europe, at 12.5%; a young, skilled, well-educated work force with relevant technological and business skills; protection of intellectual property; a positive environment for research and development; and an advanced and competitive industrial infrastructure.
The Irish governments economic policies are directed toward the creation of a stable economic environment that is supportive of the needs of business. Irelands economic growth rates in recent years have consistently been among the highest among those ranked in the Organization of Economic Cooperation & Development. Ireland offers investors a stable, profitable, English-speaking base to serve world markets. This is why more than 1,050 overseas companies have made Ireland their location of choice.
In 1973, the Irish Republic became a member of the European Union, which has helped the country converge with the wealthier members on the European mainland. Irelands decision in 1999 to adopt the euro as its currency, joining 11 other European Union members, has also contributed to its economic convergence toward its wealthier and bigger neighbors in Europe, such as Germany.
Although it has a similarly sized population of 3.9 million, Ireland is seven times larger in land area than Puerto Rico. Ireland, like Puerto Rico, has a strategic location on major air and sea routes, but there also lies the big difference. Ireland is in Europe, not in the Americas, and most trade in the Americas isnt with European nations but with the U.S. It is logical and good business practice for Ireland to seek economic and political integration within Europe, as many argue it should be for Puerto Rico to pursue further integration with the U.S. mainland.
The Irish strategy of integration has outperformed Puerto Ricos autonomous economic model. In 2000, the per capita GNI of Irish citizens was $25,970, or $10,840 higher than Puerto Ricos. In 2002, Irelands GNI of $98.8 billion was more than twice Puerto Ricos $45 billion.
Israel is also mentioned when comparing Puerto Ricos economic performance with that of independent countries. Israel has a population of 6.2 million and is approximately the size of New Jersey in terms of land area, and at 8,017 square miles more than twice the size of P.R. Its per capita GNI is one of the highest in the Middle East, surpassing all of its oil-rich Arab neighbors except for the United Arab Emirates. Israels 2003 per capita GNI of $19,200 (PPP) was $2,880 higher than Puerto Ricos.
In 1960, Puerto Ricos GNI of $1.7 billion was 59% of Israels $2.9 billion; by 2002, Israel had climbed to $100.9 billion, compared with Puerto Ricos $45 billion. On a per capita basis, however, it is quite a different story. In 1975, Puerto Ricos per capita GNI of $2,650 was 59% of Israels $4,530; it was 63% a decade later and 78% in 2000. On a per capita basis, Puerto Rico has been doing much better than Israel, converging toward that countrys originally higher per capita GNI.
The U.S. has had a long-term commitment to the security, well-being, and economic development of Israel. President Harry S. Truman said in a speech on Oct. 28, 1948, "It is my responsibility to see that our policy in Israel fits in with our policy throughout the world; second, it is my desire to help build in Palestine a strong, prosperous, free, and independent democratic state. It must be large enough, free enough, and strong enough to make its people self-supporting and secure." The U.S. has lived up to its commitment and its aid has been instrumental to Israels economic performance.
According to the American-Israeli Cooperative Enterprise, Israel has received more direct aid from the U.S. since World War II than any other country. Since 1949, total assistance to Israel from the U.S. has amounted to $97.8 billion, including the proposed $2.6 billion for 2005. Once a traditional economy, based mainly on agriculture, light industry, and labor-intensive production, Israel has become a knowledge-based economy with internationally competitive telecommunications, high-tech, and agro-technology industries. Israels military expenditures are another important part of the economy; in 2003, they totaled $9.11 billion, or approximately 9% of the nations GDP.
Israels economy has also benefited from a rather unique situation: the influx of Russian immigrants. The number of Jewish immigrants from the former Soviet Union topped 750,000 during the 1990s, bringing Israels population from the former Soviet Union to one million, one-sixth of the total, and adding scientific and professional expertise of substantial value for the Israeli economy. The situation is exactly the opposite in Puerto Rico, where there has been a scientific and professional exodus.
Although the commonwealths economic performance has been lacking in comparison with the U.S. mainland states, this isnt the case in comparison with the vast majority of small independent nations that have emerged over the past 50 years. According to the World Banks 2003 per capita GNI ranking, Puerto Rico surpassed the vast majority of independent countries, including all of the independent republics of Latin America, none of which have been able to reach the wealth levels of the U.S. mainland. Independence has not been an economic or political panacea for the majority of small independent countries around the world.
Competitiveness is the key in the global economy. In its "First Report to the President & Congress" in 1992, the U.S. Competitiveness Policy Council said competitiveness is the degree to which a nation can, under free trade and fair market conditions, produce goods and services that meet the test of international markets while maintaining and expanding the real incomes of its people over the long term. The Competitiveness Advisory Group said, "Competitiveness should be seen as a basic means to raise the standard of living, provide jobs to the unemployed, and eradicate poverty."
According to the IMDs 2004 World Competitiveness Yearbook, a world-renowned and comprehensive report ranking 60 national and regional economies, the U.S. is the most competitive nation in the world, with an index score of 100. The intelligence unit of San Juan-based research firm QBS recently performed a competitiveness assessment of Puerto Rico to integrate the island into the IMD rankings. Puerto Ricos competitive index score was 62.5, which would give it a global ranking of 35.
In comparative international economic terms, being a territory of the U.S. has been positive for Puerto Rico; the economic growth and improvements have been substantial. The territory has progressed from being the "poorhouse of the Caribbean" to being the "poorhouse of the U.S.," the wealthiest economy in the world.
Next week, CARIBBEAN BUSINESS will examine the economic performance of the Freely Associated States.
Gross National Income (GNI) Per Capita Comparison of Selected Countries
1975 / 1980 / 1985 / 1990 / 1995 / 2000
Ireland: 3,260 / 5,420 / 7,640 / 11.400 / 15,820 / 25,970
Singapore: 2,470 / 4,970 / 7,710 / 12,170 / 18,350 / 23,780
Israel: 4,530 / 6,940 / 9,500 / 12,530 / 16,400 / 19,490
Puerto Rico: 2,650 / 4,530 / 6,000 / 8,860 / 11,770 / 15,130
Chile: 1,270 / 2,380 / 2,970 / 4,450 / 7,050 / 8,890
GNI: A World Bank economic title for GNP (gross national product)
Analysis: CB Research & QBS Intelligence Unit
Source: World Bank
2004 World Competitiveness Ranking & Score
No. 1 USA (100)
No. 2 Singapore (90)
No. 10 Ireland (80)
No. 26 Chile (70)
No. 33 Israel (63)
No. 35 Puerto Rico (63)
No. 42 Colombia (57)
No. 57 Mexico (43)
No. 60 Argentina (37)
Analysis: QBS Intelligence Unit
This Caribbean Business article appears courtesy of Casiano Communications.