The country is developing the capacity to gauge market changes and the flexibility to respond to them

n the past, Puerto Rico’s economic success has been based on manufacturing, and its privileged relationship with the U.S. has provided incentives for economic development in this and other areas. However, changes are afoot both globally and locally, and Puerto Rico is now regrouping its economic strategies to find the best way forward.

One important change has been the repeal of U.S. Internal Revenue Code Section 936, a law which provided U.S. firms operating in Puerto Rico with tax-free income. Although there have been fears that this could adversely affect investment by U.S. firms in Puerto Rico, Milton Segarra, Secretary for Economic Development and Commerce, says none have moved away from the island because of the change. “On the contrary, in the last three years we have accomplished over $2.2 billion in investment,” he says. He does, however, underline the need for Puerto Rico’s next administration to maintain and develop improved incentives for attracting companies.

The main factors that are forcing Puerto Rico to develop a new approach are a decrease in competitiveness compared with countries such as Ireland, Chile, and Singapore; the shift of the world’s manufacturing base eastwards, namely to China; and the creation of trade agreements such as the Free Trade of the Americas Act (FTAA), which grants other countries privileged access to U.S. markets.

The most obvious solution and one that is currently under way is an economic shift from manufacturing to technology. A knowledge-based economy, believes Mr. Segarra, is the model to follow. He is one of the engineers of Vision 2025, an ambitious long-term plan which sets out the course for the country’s economic and social development. The plan also takes in infrastructure and natural resources development, and is based on the concept of joint responsibility from the public, private, and academic sectors in order to see it through.

José J. Villamil, President of Estudios Técnicos, believes that Puerto Rico primarily needs to develop the capacity to gauge market changes and the flexibility to respond to them. He points out that while Puerto Rico is losing out to countries with a lower minimum wage, for example, it still has many advantages, particularly in certain added-value industries. “We have full access to funds of the U.S. National Science Foundation and other organizations for clinical testing purposes.

We have to focus on promoting that type of activity,” he says. The existence of a financial infrastructure, a strong financial sector, and international banking laws suggest that Puerto Rico could also become an exporter of advanced services.

The Puerto Rican government is investing heavily in short-term infrastructure projects

But first it needs to restructure its economy from public to private enterprise. “It is fundamental that the private sector assumes a more important role to define the economic agenda of the country,” says Mr. Villamil.

In the short term, however, public construction could be the engine of economic recovery. The prevailing recession in both the U.S. and Puerto Rico over the past two years has led to a decline in private-sector projects. The government’s response has been to inject as much money as possible into the economy, and it has invested $7.9 billion in infrastructure projects as part of several short-term initiatives. Now it seems as though investor confidence in the private sector is beginning to rise, with new investments being made in machinery and equipment.

Puerto Rico has experienced a moderate sustained economic rebound, and economic growth for the fiscal year is expected to be around three percent.
Mr. Villamil is confident of the country’s capacity for recovery. The most urgent issue is perhaps, he says, “to redefine the concept of Puerto Rico”.