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The China Syndrome


February 3, 2005
Copyright © 2005 CARIBBEAN BUSINESS. All Rights Reserved.

Gone forever are the days when Puerto Rico lured companies with low wages and federal tax incentives as the main attractions. In today’s global economy, even if the U.S. Congress were to grant another Section 936-type tax incentive to Puerto Rico, it is unlikely manufacturers would be attracted to the island in large numbers, considering what it costs to operate here and the open access companies now have to cheaper labor markets, particularly China.

While in Puerto Rico, we continue to quarrel over politics, status, and tax incentives, among a long list of other issues, China has taken the global market by storm, rapidly becoming the world’s factory and a major recipient of direct foreign investment. The fact is China is becoming the place to be in the 21st century, offering wages that are substantially lower than Mexico, the Dominican Republic, Costa Rica, Singapore, and other developing economies. With a labor force consisting of almost one billion people who will work for just pennies an hour, China is providing global companies access to low costs and high profits.

And it’s no longer just low-skill manufacturing jobs that are heading for China. The country has entered into the area of technology with major global firms investing in Chinese ventures. Companies including Hewlett-Packard, IBM, Compaq, Lucent Technologies, Motorola, Solectron, and others have invested billions in the country. In the area of manufacturing, it only will get worse for the mainland U.S., many other countries, and Puerto Rico.

It’s easy to ignore what is happening in China and many have opted to do so, believing the economic development on the other side of the globe will have no impact on the island’s economy. However, the reality is that developments in China already are having an impact on Puerto Rico’s economy. China’s growing demand for petroleum, steel, and other commodities have contributed to higher prices in Puerto Rico for gasoline, electricity, and construction. Cheap labor in China is also leading companies currently in Puerto Rico to establish or expand their operations in China, making it increasingly more difficult for Puerto Rico to compete for new investments, particularly in the area of manufacturing.

So, where exactly does that leave Puerto Rico?

Puerto Rico must get on the ball and finally realize we are living in a global economy that we don’t control or the island will be left with little to offer U.S. or foreign investors. Gone are the companies that fueled the electronic boom of the ‘70s and ‘80s in Puerto Rico; but that doesn’t mean the island has little to offer. Puerto Rico still has plenty of economic opportunities that can continue fueling its growth well into the century. Tourism is a classic example.

The tourism and hospitality sector is a labor-intensive industry; it doesn’t depend on low-skill, cheap labor; the employment created in this sector can’t be outsourced. It relies on Puerto Rico’s own natural resources and attractions. Puerto Rico also has a year-round tropical climate, the protection of the U.S. flag, and the security and safety that mainland U.S. tourists have been seeking in this post 9/11 world.

Puerto Rico is blessed with a strategic location between North and South America, on the Mona Passage, the only route through the Western Hemisphere to and from the Panama Canal, which makes the island the perfect place for a major international transshipment port that can manage growing worldwide trade. Puerto Rico has the only harbor within a thousand miles of the Mona Passage that is big enough to be developed into a major transshipment port.

Puerto Rico also has a solid financial industry that is expanding into new markets and a service sector that can continue growing and creating new jobs.

The administration of Aníbal Acevedo Vilá has many challenges ahead during its four-year term. Puerto Rico’s economic model is more than 50 years old and is no longer realistic in the 21st century global economy. In addition to the many challenges it will face, starting with the $1 billion budget deficit and credit lines that are close to their margins, the administration’s new economic team will have to create new strategies that will allow Puerto Rico to compete on a global scale. The island can no longer depend on economic tax incentives or low wages to attract investment.

This Caribbean Business article appears courtesy of Casiano Communications.
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