Puerto Rico has one of the most dynamic economies in the Caribbean region. Plantation sugar production dominated Puerto Ricos economy until the 1940s. Industry has surpassed agriculture as the primary sector of economic activity and income. Encouraged by duty free access to the U. S. and by tax incentives, U. S. firms have invested heavily in Puerto Rico since the 1950s. As a result, Puerto Ricos export and import has prospered nearly doubling between fiscal years 1987 and 1997.
Recently the economy has suffered budget cuts from U. S. The Puerto Rican economy has depended heavily on the tax incentives given to U. S. mainland companies and on federal transfers. In 1993, President Clinton aimed to cut the Section 936 tax exemption for U. S. companies and introduced legislation to Congress to replace it with a more modest tax credit linked to wages paid by those companies in Puerto Rico rather than to profits. It is estimated that 100,000 Puerto Ricans were employed by companies operating under Section 936 and another 200,000 are indirectly employed.
In President Clintons 1998 budget submission to Congress, proposed that existing Section 30A of the tax code be made permanent to provide an estimated U. S. $417 million a year in tax incentives to compensate for the phasing out of Section 936. Section 30A allows companies to claim 60% of wages and capital investment as allowances against tax. New firms may opt to incorporate themselves in Puerto Rico as controlled foreign corporations and receive the tax benefits provided by Section 901 of the U. S. Internal Revenue Code.
Puerto Ricos government aims to make up for the 936 loss by providing new local incentives, cutting taxes and encouraging economic development in other industries. On the other hand, the agreement between the U. S. , Canada and Mexico for the North America 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-tec 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. By some economists Puerto Ricos economy is it considered somewhat fictitious. Puerto Rico has very few natural resources of economic value and its economy relies mainly on Federal Aid from the United States Government, which depends on the industrialization programs and the tax incentives that U. S. offers. Economists believe that reinstating IRS Section 936 or making IRS Section 30A permanent for U. S. firms operating in Puerto Rico is not the best way to stimulate sustainable development on the island.
Important industries include pharmaceuticals, electronics, textiles, petrochemicals, processed foods, clothing, and textiles. 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. 9 million tourists in 1993, and a 7% of the Islands GNP, the tourism industry employees over 60,000 people. The main government expenditures are on health, education, and welfare.