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Economy


Summary

Puerto Rico has been one of the most dynamic and competitive economies in Latin America and the Caribbean region until recent years, Puerto Rico's economy relies mainly on federal aid from the United State government. Puerto Rico's economy was dominated by sugar production up until the 1940s. Manufacturing has surpassed agriculture as the primary sector of economic activity and income; composing almost half (about 46%) of the gross domestic product (GDP) of the island. The leading industries include: pharmaceuticals, electronics, textiles, petrochemicals, processed foods, clothing and textiles. Followed by the service industry: finance, insurance, real estate, and tourism.

In 2006, Puerto Rico's growth has been negative since then. The dip coincides with the elimination of tax preferences that had led US companies to invest in the island since the 1950s.

Thus, today, Puerto Rico's major problem is the lack of jobs for an expanding population and the rate of economic improvement.

History

Puerto Rico's economy prior to the arrival of Spaniards was based on hunting and gathering with agriculture. Taíno Indians who inhabited the territory were skilled at agriculture and hunting, they were also good sailors, fishermen, canoe makers, and navigators. Their main crops were cassava, garlic, potatoes, yautías, mamey, guava, and anón.

The economy of Puerto Rico was transformed drastically upon the arrivals of Spaniards in 1493 until their departure in 1898. On 1815, the Royal Decree of Grace was issued, allowing foreigners to enter Puerto Rico, and opening the port to trade with nations other than Spain. This was the beginning of agriculture-based economic growth, with sugar, tobacco and coffee being the main products.

In 1898, following the Spanish-American War, Puerto Rico experienced another transformation. From 1898 and 1930 sugar production increased drastically, it accounted for 40% of cultivated land, 50% of agricultural labor, and more than 30% of Puerto Rico's economic activity. The increase in the price of sugar on the world markets, as well as the investment of capital, made Puerto Rico into one of the principal producers of sugar internationally.

Until the late 1950's, agriculture constituted Puerto Rico's main economic sector. Sugarcane, mostly for export to the American market, was the main crop, followed by coffee and tobacco. In 1940, agriculture employed 43% of the work force.

In the late 1940s, like many other political leaders of the time, Puerto Rican leaders believed that manufacturing was the way Puerto Rico could develop economically. Soon after, the government launched an industrialization program known as "Operation Bootstrap." Under this program the island was to become industrialized by providing labor locally, inviting investment of external capital, importing the raw materials, and exporting the finished products to the U.S. market. To entice participation, tax exemptions and differential rental rates for industrial buildings were offered. Thus, Puerto Rico's economy shifted labor from agriculture to manufacturing and tourism.

Section 936 of the US internal revenue code, passed in 1976, established a substantial tax credit for US corporations doing business in Puerto Rico and possessions of the United States. The U.S. tax code exempted the profits earned by American companies from federal taxes.

Puerto Rico's economy depended heavily on these incentives. Some corporations were also allowed to import their products into the United States duty-free.

In 1993, President Clinton aimed to cut the Section 936 of the U.S. tax code. Section 936 was replaced with Section 30A, which allowed companies to claim 60% of wages and capital investment as non-taxable income. A more modest tax credit linked to wages paid by those companies in Puerto Rico rather than to profits was introduced. Pharmaceutical companies and high-tech industries based in Puerto Rico were to have an advantage over NAFTA member Mexico, whose low wages in low-skill labor-intensive jobs competed with Puerto Rican jobs.

It is estimated that 100,000 Puerto Ricans were employed by companies operating under Section 936 (of which 23,000 are in pharmaceuticals) and another 200,000 are indirectly employed.

In 1996, Congress opted to phase out Section 936 by the year 2006. To no one's surprise, many companies in Puerto Rico closed. The number of manufacturing jobs on the island dropped by almost half by 2014. The unemployment rate remains high at 12.6 percent—more than twice the U.S. average rate, a factor that to c ontinues drive the out-migration.

On the other hand, the agreement between the U.S., Canada and Mexico for the North American Free Trade Agreement (NAFTA) also has implications for Puerto Rico because of competition for jobs and investment. Although wage levels are lower in Mexico, Section 30A gives companies in Puerto Rico an advantage in pharmaceuticals and hi-tech industries. In low-skill labor-intensive manufacturing, such as clothing and footwear, Mexico has the advantage. Puerto Rico currently employs 30,000 in the clothing industry.

Puerto Rico's economy is affected by the same factors affecting the US economy. The downturn in the US economy that began in 2001 negatively impacted the Puerto Rican economy more severely than the mainland economy. The September 11, 2001 terrorist attacks on the United States also had an adverse effect on the Puerto Rican tourist industry. By 2003, the economy was beginning to show signs of stabilizing: unemployment stood at 11.9% in the first quarter of 2003, down from over 13% in 2002.

Considering all these factors, Puerto Rico's tanked economy triggered an exodus of island residents to the mainland not seen since the 1950s. The Census Bureau's Community Survey shows that in 2011 and 2012, about 55,000 residents migrated from the island to the mainland each year.

In addition, sugar production has lost out to dairy production and other livestock products as the main source of income in the agricultural sector. The principal livestock are cattle, pigs and poultry. Tourism has traditionally been an important source of income for the island, with estimated arrivals of nearly 3.2 million tourists in 2013, and a 7% of the Island's GNP, the tourism industry employees over 63,500 people.

As of June 2015, Puerto Rico is on the brink of default. Puerto Rico's external debt is part of the U.S. debt, but the island has a public debt approaching US$16 billion. Puerto Rico carries more debt per capita than any state in the United States. To make matters worse, Puerto Rico's unemployment rate is above 15%, more than double the 7.3% in the mainland, per the Bureau of Labor Statistics.

The main government expenditures are on health, education and welfare.

Duties on imports from countries outside the U.S. tariff wall are collected at Puerto Rico's borders but sent to the Puerto Rico Treasury, not the U.S. Treasury.

Finance

There are currently 19 commercial banks in Puerto Rico, most of them local corporations. Local banks institutions includes: Banco Popular, which is considered the largest banking institution in the island, with over one hundred branches throughout the island, Banco de San Juan, and Banco Mercantil de Puerto Rico; and branches of US: Citibank and FirstBank; and foreign banks: Banco Bilbao-Vizcaya, and Banco Santander, the second largest bank in Puerto Rico. The government owns and operates two specialized banks- the Government Development Bank (GDB) and the Economic Development Bank (EDB).
Banks offer a wide range of products and services such as checking and savings accounts, CDs, IRAs, loans, credit and debit cards, and electronic banking. Automatic teller machines are abundant, commonly referred to as ATHs. Banks are insured by the Federal Deposit Insurance Corporation. They are subject to all Federal controls applicable to banks in the United States of America.

Stock Market
Puerto Rico does not have its own Stock Market, and many of its larger corporations are listed on U.S. stock markets. On June 15, 2004 Popular, Inc. become the first Puerto Rican Financial Company to open the Nasdaq Stock Market.

Currency

United States dollar (USD)
Since Puerto Rico is part of the United States, the island's currency is the US dollar. Puerto Rico relies on the U.S. government to print money and to manage the money supply via the U.S. Federal Reserve and the Central Bank.

The US dollar is divided into 100 cents (¢) and referred by locals as "peso".

Coins: 1¢, called the centavo or chavito (penny); 5¢, called the vellón or ficha (nickel); 10¢ (dime); 25¢, called the peseta (quarter); and the seldom-seen 50¢ (half-dollar) coin and $1.

Bills: $1, $2, $5, $10, $20, $50, $100, $500, $1,000, $5,000, and $10,000. On July 14, 1969, the Treasury Department and the Federal Reserve Board announced that they would immediately stop distributing currency in denominations of $500, $1,000, $5,000 and $10,000. Production of these denominations stopped during World War II. Their main purpose was for bank transfer payments.

Market Value Stats

Gross National Income (GNI per capita) (formerly GNP per capita): $53.4 billion; per capita: $13,675.1 (2006)
Puerto Rico is classified as a high income country, high income countries are defined by the World Bank as countries with a Gross National Income (GNI) per capita of $11,116 or more.

Interesting Fact
The Gross Domestic Product, or GDP, measures the amount of goods and services (economic activity), measured at market prices, and produced within the country during a particular time period (usually a year). The Gross National Income, or GNI (formerly Gross National Product, or GNP), is the amount of goods and services produced by residents of a country, regardless of where that production takes place. In other words, the GDP is the value of the goods and services produced within the country, while the GNI is the value of goods and services produced by citizens of a country. For example, when an American company generates profits from a production in Mexico, these profits would be counted towards the U.S. GNI, not towards the Mexican GNI. Yet, these same profits will be counted as part of Mexican GDP, not the U.S. GDP, because the production takes place within geographic boundaries of Mexico.

Gross Domestic Product (GDP) - purchasing power parity - $131.9 billion (2015 est.)

GDP (official exchange rate): $101.6 billion (2015 est.)

GDP - real growth rate: -1.3% (2015 est.)

GDP - per Capita (purchasing power parity): $38,000 (2015 est.)

GDP per Capita Country Comparison

Country 2000 2008 2009 2010
Puerto Rico 10,000 18,100 17,400 16,300
United States 36,200 48,300 46,700 47,400
Jamaica 3,700 8,800 8,500 8,400
Cuba 1,700 9,700 9,800 9,900

Puerto Rican workers are covered by the U.S. Federal Fair Labor Standards Act (FLSA) are subject only to the Federal minimum wage ($7.25) and all applicable regulations. Workers not covered by the FLSA will be subject to a minimum wage that is at least 70 percent of the Federal minimum wage or the applicable mandatory decree rate, whichever is higher. Labor costs are below the mainland average, but are higher than in other areas of the Caribbean Basin.

Gross Domestic Product: real growth rate - -0.6% (2013 est.)

GDP - composition, by end use:
household consumption: 90.4%
government consumption: 13.4%
investment in fixed capital: 12.6%
investment in inventories: 0.5%
exports of goods and services: 114.3%
imports of goods and services: -131.1% (2015 est.)

GDP - composition by sector:
agriculture: 0.8%
industry: 50.1%
services: 49.1% (2015 est.)

Labor Stats

Labor Force: 1.139 million (December 2014 est.)
1.286 million (Mar 2012)

Labor force - by occupation: Services: 29.9%, Government: 23.7%, Trade: 21.8%, Manufacturing: 9.2%, Transportation and other public utilities: 5.2%, Construction and mining: 4.9%, Finance, insurance and real estate: 3.7%, Agriculture: 1.6%. (2010)

Construction Growth: 15% (1997 est.)
Construction is currently one of the most dynamic activities in Puerto Rico's economy. Since the mid-1980s, the construction industry has grown faster than most other economic sectors, helping to sustain the overall growth of the economy.

Organized Labor:
115,000 members in 4 unions; the largest is the General Confederation of Puerto Rican Workers with 35,000 members (1983).

Unemployment Rate: 11.8% (Mar 2015)
The Unemployment Rate increased to 11.80 percent in March of 2015 from 11.60 percent in February of 2015.

Average Hourly Wage: $8.08/hour, well below the U.S. average.

Minimum Wage Rate (per hour): $7.25 (2016)

Basic Minimum Rate (per hour): $2.13 to $5.12. (2016)

Population Below Poverty Level: 45.4% (2012)

Interesting Fact
What is the poverty income level?

The U.S. Department of Health and Human Services and U.S. Census Bureau both record poverty statistics for the United States, but they each have their own calculations for the poverty income level.

The poverty guidelines are not defined for Puerto Rico, the U.S. Virgin Islands, American Samoa, Guam, the Republic of the Marshall Islands, the Federated States of Micronesia, the Commonwealth of the Northern Mariana Islands and Palau.

Puerto Rico uses its own poverty level which is significantly lower than the FPL - roughly equal to half of it.

In February of each year the U.S. Department of Health and Human Services (HHS) issues the Federal Poverty Guidelines in the Federal Register. These poverty guidelines are one version of the federal poverty measure.

The poverty level as defined by the HHS in 2004 was $15,670 a year for a family of three, or $18,850 for a family of four.

Another version by the Census Bureau, calculates the poverty thresholds using the federal Social Security Administration's official poverty definition, who coincidentally works with the HHS in the administration of certain programs.

The poverty level as defined by the Census Bureau in 2004 was $14,776 a year for a family of three, or $19,484 for a family of four.

Household income and expenditure:
Average family size: 3.6
Income per family: U.S. $27,017

Sources of income: wages and salaries 56.3%, transfers 29.5%, self-employment 6.4%, rent 5.2%, other 2.6%; expenditure (1995): food and beverages 20.4%, transportation 13.6%, health care 13.4%, housing and energy 12.2%, household furnishings 12.0%, recreation 8.9%. (1995)

Inflation Rate (consumer prices): -0.8% (2015 est.)

Food Inflation -1.10% (July of 2016)


Taxes

Puerto Rico general sales and use rate increased from 7% to 10.5% with an effective total tax rate of 11.5% on many transactions when combined with the municipal sales and use tax of 1% (as of July 1, 2015). Puerto Rico now has the highest sales tax in America. In addition, in the event that the governor determines an insufficiency in collections for the general fund an additional 1% to the central government will be imposed.

All inbound shipments to Puerto Rico are subject to a local excise tax. Merchandise and/or articles arriving from the U.S. that will be sold, consumed, given away, and/or remain in Puerto Rico are subject to a 6.6% Puerto Rico excise tax that is calculated from the commercial invoice value. This is payable upon entry to Puerto Rico.

Puerto Rico has it own tax system. Although it is modeled after the U.S. system, there are differences in law and tax rates.

The Puerto Rico tax system is based on self-assessment. Taxes are paid to the state. In addition, a premium is paid to the Social Security. Individual taxpayers are required to file an annual income tax return when minimum-income thresholds are met. They report taxable income and deductions, compare their final tax liability to any income tax withheld or estimated tax paid, and determine any balance due or overpayment of tax due from the Treasury.

For information about the filing taxes in Puerto Rico contact the Bureau of Income Tax at the following address:

Negociado de Asistencia
Contributiva y Legislación
Departmento de Hacienda
P.O. Box 565
San Juan, Puerto Rico 00902-6265
(787) 721-2020, ext. 3611

To obtain tax forms, contact the Forms and Publications Division Office at the above address or call (787) 721-2020, extensions 2643, 2645, or 2646 or visit the Internal Revenue Service web site.

These forms are also available online along with the other tax forms, instruction booklets, etc. To obtain these forms visit the Departmento de Hacienda web site.

Corporate Tax Rate 39% (Nov 2016)

Personal Income Tax Rate 33% (Nov 2016)

Exports and Imports

Exports: $71.1 billion (2015 est.)

Export Commodities: Chemicals, electronics, rum, beverage concentrates, medical equipment, among others. (2010)

Export Partners: United States 90,3 %, United Kingdom 1,6 %, Dominican Republic 1,4 %, Netherlands 1,4 %, among others. (2010)

Imports: $49.71 billion (2015 est.)

Imports Commodities: chemicals, machinery and equipment, food, petroleum products, among others. (2010)

Imports Partners: United States 55 %, Ireland 23,7 %, Japan 5,4 %, among others. (2010)

Public Debt: 96.6% of GDP (2015 est.)

Debt - external: $56.82 billion (31 December 2010 est.)
country comparison to the world: 59

Revenues:
$31.3 billions (Consolidated Budget) (FY-2010)
increase $13.1 billions (Net Revenues, Commonwealth) (FY-2010)[11]

Expenses:
$29.1 billions (Consolidated Budget) (FY-2010)
decrease $10.2 billions (Commonwealth) (FY-2010)

Industries

Manufacturing accounts for 55.5% of GDP: manufacturing of pharmaceuticals, chemicals, machinery, electronics, apparel, food products, instrument, textiles, clothing, and tourism.

Manufacturing:
Puerto Rico's manufacturing sector has shifted from the original labor-intensive industries, such as the manufacturing of food, tobacco, leather, and apparel products, to more capital-intensive industries, such as pharmaceuticals, chemicals, machinery, and electronics. Major manufacturing activities in the order in which they contribute to the manufacturing domestic income are chemical and allied products, machinery and metal products, food and kindred products, apparel and related products, printing and publishing, leather and leather products, stone, clay, and glass products, tobacco, paper and allied products, and textile mill products.
San Juan and Mayagüez are the leading centers for making clothing.

Manufacturing Average Hourly Earning: $7.85

Manufacturing Average Weekly Earning: $310.86

Percentage of Manufacturing Employment by Industry Group:
Chemical and allied products 18.2%, Apparel and other textile products 15.5%, Electronic 15.2%, Food and kindred products 13.2%, Instruments and related products 9.8%, Paper and related products 4.7%, all other manufacturing 23.3%

Resources: (1999)

Fuel Purchase: 35,631,482 barrels
Fish: 7,493,000 pounds
Total value: $16,791,000
Livestock: 38,680,000 pounds
Total value: $31,908,000
Minerals: Mining activities are limited to quarry operations
Electricity: Annual energy production: 20.9 billion kWh (2001)
Total capacity: 5390 megawatts/hour

Energy:
Oil is the dominant fuel in Puerto Rico's energy mix, accounting for 97.7% of total primary energy consumption (0.35 quadrillion Btu) in 1999.

Motor Gasoline: 2,550,000 metric tons coal equivalent
Electricity: 1,690,000 metric tons coal equivalent
Energy Consumption: 2,493 kwh per capita

Electricity Costs:
The cost of electrical services in the industrial sector depends on the consumption and the kind of service provided. (example for services provided under 50 KVA included below)

monthly charge = $5.00
energy per KW/hr = $0.065,
fuel adjustment charge per KW/hr = $0.034858

Industrial Production Growth Rate: -0.3% (2015 est.)

Tourism:
Receipts from visitors: U.S. $1,826,100,000 (1995)
Expenditures by national abroad: U.S. $833,000,000 (1995)
Tourist Receipts: U.S. $1,736,600,000 (1994)

Agriculture:
Until 1955, agriculture constituted Puerto Rico's main economic sector. Sugar cane, mostly for export to the American market, was the main crop, followed by coffee and tobacco. Sugar cane production declined as prices remained low, agricultural labor migrated to the United States, and urban expansion took over much sugar cane land. Coffee production, taking place mostly in the mountainous areas away from the pressures of urban expansion and supported by guaranteed minimum prices, has remained stable. Tobacco production has virtually disappeared. Considerable expansion has occurred in the production of dairy products, beef, pork, eggs, and poultry, although significant amounts of these products are still imported, primarily from the United States. There is also production of fruits and garden vegetables as well as of starchy vegetables, such as bananas and plantains.

Today, agriculture accounts for only 3% of labor force and less than 1% of GDP, concentrating primarily to crops which can be sold in the United States. Coffee is the most valuable crop, followed by vegetables, sugar cane, fruits (pineapples, plantains, bananas), milk, eggs, and livestock (cattle, chickens, pork).

Interesting Facts

  • Migration has played a large role in social and economic changes since the 1950s. In the 1950s and 1960s, the government encouraged a massive migration of poor agricultural workers to the east coast of the US to help create a predominantly industrial economy. The number of Puerto Ricans is now about equal to the island's population.
  • Puerto Ricans are another immigrant group that has had a significant impact on the economy and culture of New York since World War II. Several hundred thousand reside in the state, mostly in New York City. After a heavy immigration of Puerto Ricans during the 1950s and early 60's, the growing economic strength of Puerto Rico led to a considerable reduction, with those entering the state being largely offset by those returning to Puerto Rico.
  • Some of the best-educated young people leave because of better opportunities and labor conditions on the mainland.
  • Statistics show that it has some of the most favorable economic conditions; the gross national product (GNP) is growing much more rapidly than the population, and the GNI per capita (formerly GNP per capita) is one of the highest in the Caribbean, but in comparison with the United States, Puerto Rico is still below that of the poorest state in the mainland, Mississippi. In 1989, Puerto Rico received 72 times more food stamps than Mississippi, half the island's population currently receives food stamps.

Economic Aid: none

Economic Development:
Economic Development Administration (Administración de Fomento Económico) 787-758-4747
Puerto Rico Industrial Development Company 1-888-577-4326
Small Business Administration 787-766-5572

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San Juan is one of the world's 10 busiest container ports and a major hub for Caribbean maritime shipping.