The history of Puerto Rico in the twentieth century is a history of massive social and economic changes. It is an example of how one agrarian society transformed into a modern industrialized economy and provides us with an interesting look at the role government institutions can play in economic development and social change. This paper will focus on the people of Puerto Rico and their ability to transform their society to meet the needs of a growing population through the application of technological advances and institutional reforms. It will seek to answer the question of why Puerto Ricans industrialized their economy and how they went about doing it.
When the United States (U.S.) took control of Puerto Rico in 1898 the island was marked by 400 years of Spanish colonial rule. Puerto Rico, along with other colonies in the Caribbean, was an important agricultural base for international markets. Ironically, the Spanish almost granted the island independence in 1898 but with the arrival of U.S. troops during the Spanish-American War that same year, the island became a war prize and was transferred to U.S. military control. In July 1898 Maj. Gen. Nelson Miles gave a famous speech to the people of Puerto Rico saying:
“In the prosecution of the war against the kingdom of Spain by the people of the United States, in the cause of liberty, justice, and humanity, its military forces have come to occupy the island of Puerto Rico. They come bearing the banner of freedom. They bring you the fostering arm of a nation of free people, who's greatest power is in justice and humanity to all those living within its fold.”
While the U.S. was unable to transform the lofty rhetoric of liberty into the concrete reality of independence, it did succeed in extending a fostering arm that marked U.S. – Puerto Rican relations and the islands economic growth throughout the twentieth century.
Initially the U.S. continued the Spanish colonial legacy of large commercial plantations. In 1900 the U.S. Congress created a civil government on the island made up of a governor and five federally appointed members to replace the military system in effect after the war and in 1917 the U.S. Congress passed the Jones Act that granted U.S. citizenship to Puerto Ricans. The Great Depression of 1929 and U.S. President Franklin Roosevelt’s “New Deal” economic policies heavily influenced young politicians in Puerto Rico who gained experience and influence by administering government social programs on the island. The decision to undertake a massive reform of the island’s institutional and economic structure, following on the heels of the success of the New Deal, came naturally to politicians who had witnessed the same thing occur just years before in the U.S.
When Luis Muñoz founded the Partido Popular Democrático (PPD) in 1938, he founded a non-marxist, pro-U.S., labor party that quickly won the support of the majority of Puerto Ricans as well as the U.S. Congress. The party platform emphasized three basic points. First, it was pro-independence, but not to the exclusion of other issues, the PPD was more concerned about social and economic security than deciding the federal status of the island. The second point was an emphasis on institutional change. The party focused on eliminating corruption and waste in the government and improving administrative infrastructure to more effectively direct the island’s economy. Finally, the PPD fought for social justice and represented a popular peoples’ movement. Under Muñoz’ leadership, the PPD won control of the Puerto Rican Senate in the November 1940 elections with 38% of the vote.
In 1941 Rexford Guy Tugwell, an agricultural economist and one of Roosevelt’s New Deal “brain trust,” was appointed governor of Puerto Rico. Throughout the 1940s this political team worked together to enact a series of administrative reforms that centralized authority and reinforced the political infrastructure in Puerto Rico.
The need for political reform can be explained by the institutional explanation of economic change given by Douglass North and R.P. Thomas. In this model, as population grows, society experiences diminishing returns in agriculture, causing a disequilibrium and change in institutional structure. As the island’s population grew, the traditional agrarian economy was unable to provide enough food for citizens leading to malnourishment, hunger and a high cost of living. By 1944 the PPD used popular discontent with the status quo to consolidate their political base and win the November elections with 64.7 percent of the majority. Once firmly in power, the PPD began to institute political reforms that would allow for a more efficient management of the island’s economy. The rise of the PPD and the greater political autonomy granted to the island in 1948 enabled the party to consolidate decision-making power in the hands of locals who were more aware of the realities of island society than U.S. political appointees. The result of these reforms was the implementation of a series of economic initiative known as Operation Bootstrap, a revolutionary attempt to reshape the economic framework of the island and create a modern market-based system that would “develop the island and provide an inspiration for Latin America.”
Until 1956 Puerto Rico was still a predominantly agricultural society. Sugar, coffee, tobacco, and molasses were the primary cash crops produced on corporate haciendas and the majority of the Puerto Rican population lived and worked in rural areas. The diminishing returns of this agricultural system were caused by a series of market, social, and environmental factors that gradually eroded the profitability of the system.
The first step in the decline of the agricultural system came about naturally. In 1899 the longest lasting hurricane in recorded history devastated the island. Hurricane San Ciriaco hovered over the island for 28 days killing over 3,000 people and causing millions of dollars of crop damage. The financial loss sustained by farmers, specifically large coffee growers, was made worse in 1901 when the U.S. Congress passed the Foraker Act, establishing a civil government and free commerce between the U.S. and Puerto Rico. The establishment of free commerce opened up Puerto Rican markets to competitors it had never previously been exposed to, both inside and outside the U.S. Strong competition from Brazilian coffee growers, a rising cost of living on the island, as well as federally imposed credit limitations on the coffee industry combined to make production in this sector unprofitable. As coffee profitability declined, it was replaced by U.S. owned corporate sugar plantations that merely shifted emphasis from one crop to another. Instead of picking coffee, Puerto Rican rural laborers would cut sugar cane. While sugar producers did introduce new techniques that speeded production, declining profits and the rising cost of living caused growers to demand long working days from workers to help recover losses. During this time period the average sugar cutter worked 10 to 12 hours a day and lived in poverty.
The 1920s were marked by increasing class conflict between rural workers and land owners. The stock market crash of 1929 devastated Puerto Rico’s economy creating widespread hunger and unemployment. In 1930, Theodore Roosevelt Jr. reported in the island’s annual report to Congress that unemployment was at 60%. Strikes, violent protests, and the burning of sugar fields underscore the social discontent with the system. It was within this social environment that a number of populist and nationalist political parties were founded: the Partido Sociliasta Puertorriqueño (1920), the Partido Nacionalista de Puerto Rico (1921) and the successor to the socialist party, the PPD (1938). The political ideology of these groups reflected society’s discontent with U.S. management of island resources through platforms that called for island independence and social revolution.
The Land Reform Act of 1942 is a good example of the success of popular political parties. The law created the Puerto Rican Land Authority that limited corporate land holdings to no more than 500 acres (202 hectáres) each. At this time, politicians were still trying to reform the declining agrarian system because it was not yet apparent to everyone, specifically U.S. political appointees, that the old system was incapable of sustaining the economy, what was obvious was the need to calm the public. The political success of the agrarian land reform helped Muñoz and the PPD solidify support for their party to the exclusion of all other political parties on the island. The fact that the PPD was able to limit the influence of well connected U.S. corporate sugar interests highlights the extent of popular discontent and its negative effect on the market. According to Karl Polanyi, “the market system was more allergic to rioting than any other system we know.” This statement gives us a general explanation of why politicians began to take average citizens seriously and listen to their demands for improved social conditions. Work disruption, political violence, and widespread protests created a political environment that, in a pseudo-democratic system like Puerto Rico, made it a political necessity for the government to take concrete steps toward remedying the daily hardships faced by Puerto Ricans. Later in the decade, as the population continued to grow, it became apparent that mere land reform would not solve the underlying problems faced by the island. Government planners needed to diversify the economy so that it could withstand the periodic market fluctuations and generate enough wealth to provide for the population; the antiquated colonial agrarian model was not able to do this.
From the time that the PPD came to power in 1940, the party had a relatively clear idea of how they wanted to develop Puerto Rico’s economy. The Chardón Report, an assessment of the island’s economy prepared by the PPD stated that,
“the economic problem of Puerto Rico, in so far as the bulk of its people is concerned, may be reduced to the simple term of progressive landlessness, chronic unemployment and implacable growth of the population.”
To combat these problems the PPD created a series of new government institutions to tackle the demands of the growing population. In 1941, Puerto Rico founded the Compañía de Fomento Industrial (Fomento), the Banco Gubernatal de Fomento, Junta de planificación, La Autoridad de Fuente Fluviales, La Autoridad de Comunicación, La Autoridad de Acueductos Y Alcantarillados, and the Autoridad de Transporte.
While the impetus for the creation of these institutions was instigated by the PPD, Puerto Rico’s subordinate political status to the U.S. necessitated that any political change must be approved by the U.S. appointed governor and in turn by the U.S. Congress. While the PPD had a good working relationship with Gov. Tugwell between 1941 and 1946 when he retired, in general, this was a major roadblock to reform on the island because congressmen in Washington, D.C., with little understanding of local situations, were tasked with approving growth plans in Puerto Rico. The PPD understood these limiting factors and initiated a campaign for greater political self-determination. In 1947 Luis Muñoz presented plans to the U.S. Congress calling for the direct election of the governor. Congress approved the proposal and in 1948 Muñoz became the first popularly-elected governor of Puerto Rico.
Following the 1948, the PPD honored their campaign promise to tackle the question of federal status. In 1952 the party negotiated Commonwealth status with the U.S. that cleverly avoided any permanent decision while at the same time firmly linking the two economies. Puerto Ricans were granted local self-government under the U.S. constitutional framework but did not pay federal taxes, any tax revenues from Puerto Rican products sold in the U.S. was also returned to the island. The new agreement streamlined exchange between the island and mainland and through creative tax laws encouraged U.S. industrial investment.
By the early 1950s the Cold War was increasingly subordinating all other political issues in the U.S. to the necessity of beating the Soviet communist expansion. Accordingly, the rise of a pro-U.S., pro-democracy party in Puerto Rico was a unique opportunity for the U.S. to create a counter-model to the Soviet socialist revolutions; the result was Operation Bootstrap. The plan was to stimulate investment in basic infrastructure and improve the labor force by replacing sugar plantations and small farms with labor intensive factories. U.S. companies were encouraged to open manufacturing plants on the island through federal and local tax holidays and relaxed wage laws. Although Puerto Rico was subject to federal minimum wage laws the PPD had negotiated an exemption in 1940 to allow the island economy a chance to catch up to the U.S. The majority of these factories were small U.S. affiliates that used the island as a low cost assembly center for U.S. products that were later shipped back to the U.S. for sale.
Operation Bootstrap was an experiment. The failures of government-run industries in the 1940s convinced politicians that private investment was necessary to industrialize the economy to create jobs for Puerto Ricans. The trick was to convince U.S. companies to relocate to Puerto Rico and assume the additional cost of operating on the island. One of the first steps was the passage of a 100% tax exemption law in 1947. While critics charged the PPD with selling out popular interests to U.S. capitalists, the administration argued that the “psychological cost of capital,” that is, the risk of investing in Puerto Rico, had to be overcome by offering outside investors significant incentives to relocate. As the industrialization programs took effect, U.S. labor unions began to complain that the 1940 agreement that granted Puerto Rico exceptions to the federal minimum wage law was robbing U.S. workers of jobs. The complaint was justified, considering that by 1955 Puerto Rico had captured 20 percent of the U.S. production of brassieres. Influential leaders of the International Ladies Garment Workers Union complained to Congress that Puerto Rico was using the wage law exemptions to create sweat shops on the island. Muñoz and Muscoso countered the arguments by explaining the vast differences between the two economies. Puerto Rico’s economy, while growing, was nowhere near that of the U.S., unemployment was at 15 percent and per capita income was one-third that of the U.S. Puerto Rico, they argued, needed jobs before it could worry about wages.
The situation presented by the flight of U.S. jobs to Puerto Rico is interesting because, while it is in keeping with a development-as-exploitation model of economic change, i.e. that “core” capitalists exploit the “periphery” for cheap labor, it goes against the geographic notion of core and periphery, developed and underdeveloped. The case of Puerto Rican brassier production in the 1950s is more in keeping with class discussions on the subject that emphasized that core and periphery are more closely associated with social classes than with geographic areas. The capitalist in this case were profiting from lower class exploitation in both the U.S. and later Puerto Rico. It is also relevant to point out that the PPD was a popular movement that, based on election statistics, represented the majority of the population. It was not the capitalists who were exploiting Puerto Ricans, but the Puerto Ricans themselves, nor was the end result an impoverishment of the Puerto Rican people as the model would have us believe. Based on economic figures available, between 1950 and 1990, Puerto Rico raised the average family income from $1,495 to $22,000, life expectancy increased by 14 years, the doctor patient ratio decreased from one doctor per 4,108 persons to one doctor per 335 persons and over 135,000 additional students were attending universities.
The initial success of Operation Bootstrap in the 1950s drew world attention to Puerto Rico. In 1962, the Britannica Yearbook claimed, “Puerto Rico . . . is the most hopeful example in the Americas of how to develop an underdeveloped community in the clean atmosphere of freedom. With Fidel Castro threatening to turn Latin America into “many Vietnams” the U.S. was confronted with the challenge of proving that it really was committed to the ideals of democracy and freedom in the Western Hemisphere. The John F. Kennedy administration decided to use Puerto Rico’s success as an example of how U.S. support could help developing countries in Latin America prosper. In 1961, a day after the Bay of Pigs Invasion, Teodoro Moscoso, the director of Fomento, was named the U.S. ambassador to Venezuela, underscoring the importance the U.S. placed on Operation Bootstrap. In 1962, President Kennedy appointed Moscoso as the director of the Alliance for Progress, a U.S. foreign aid program designed to develop Latin America and support the U.S. Cold War interests. “The task we set for ourselves in the Alliance for Progress, which is the development of an entire continent,” said Kennedy in 1962, “is a far greater task than any we have ever undertaken in our history.” If Castro could export the Cuban Revolution, Kennedy would export the Puerto Rican one.
Even with all the praise being heaped on Puerto Rican politicians and the miracles of their industrial revolution, life the island economy was not creating enough jobs to keep up with the growing population. In 1900 the population of Puerto was 986,000, and by 1950 the population had more than doubled to 2,218,000, today the island population is 3,808,610 making Puerto Rico, with 435 people per square kilometer, one of the most densely populated places in the world. The island had reached carrying capacity and the economic expansion was unable to provide employment for so many people. At the start of the 1950s Puerto Ricans increasingly used their U.S. citizenship to immigrant to the mainland. While the government did not specifically endorse immigration, it did set up programs to facilitate an easy transition into U.S. society, taught basic English skills to future migrants and pressured airline companies to keep the cost of travel between the island and mainland low. Even though immigration offered a temporary solution to unemployment, it was not enough to solve the problem. Around the same time, Puerto Rico began a massive campaign to sterilize women. Clinics were set up in factories and women were given time off work to have the operation. By 1974, 35 percent of child-bearing age Puerto Rican women were sterilized and by 1980 Puerto Rico had the highest per-capita rate of sterilization in the world.
The fact that more than 40 percent of Puerto Ricans live in the U.S., despite the modern industrialized economy existing on the island today, emphasizes the role that population played in changing Puerto Rican society. While technological advances and capitalist exploitation of cheap labor played a part in the change, any model that does not give priority to the role of the people on the island would fail to explain the profound social changes that occurred during the twentieth century. Obviously, the surge in population can be attributed to improved medical techniques that decreased infant mortality and increased life expectancy, but these elements, while technical in nature, manifested themselves through their effect on population levels.
Analysis of Puerto Rican institutions, particularly the Compañía de Fomento, helps explain how Puerto Rico arrived at industrialization. While population growth explains why the society was forced to look for new solutions, it does not explain the actual process that brought about the needed change. Institutional models help us understand which specific areas were important to decision makers and how exactly they went about achieving their goals. The realization that the two part governance system used on the island until 1948 was inefficient and frustrated attempts to enact much needed reforms was an important step in the process toward change. While in theory the U.S. appointed governor was charged with the well-being of the island, in practice many appointees used their position to further U.S. business interests at the expense of the population. The decision to create a 100 percent tax-free business-environment would probably have generated much stronger opposition if it had come from a political appointee as opposed to the popularly elected governor. However, the institutional reform that gave the island more political self-determination was critical in the success of the policy that attracted so much businesses to the island.
In conclusion I have attempted to develop a model of economic change that explains what happened in Puerto Rico in the twentieth century by showing the necessities placed on politicians by the growing population. A system that worked poorly with less than one million people in1900 was entirely incapable of providing for the 3.8 million that inhabited the island at the end of the century. Puerto Ricans used government institutions to manipulate tax laws and create economic incentives to industrialize the economy and create jobs for unemployed workers. That the results of this industrialization process are unclear and, at the very least, contributed to the migration of millions of citizens is irrelevant to explaining how and why this change occurred. What is important is understanding the process that brought about these changes.
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