Balance of External Payment of Puerto Rico, 1942-1946 by La Colección Puertorriqueña

FA~~Sfl

BALANCE OF EXTERNAL PAYMENTS OF PUERTO RICO 1942 - 1946

By ROBERT L. SAMMONS and BELEN H. CESTERO

E DITORIAL UNIVERSITARIA UNIVERSIDAD DE PUERTO RICO RIO PIEDRAS

U~RRp

BALANCE OF EXTERNAL PAYMENTS OF PUERTO RICO 1942 - 1946

By ROBERT L. SAMMONS and BELEN H. CESTERO Under the auspices of the Social Science Research Center

EDITORIAL UNIVERSITARIA UNIVERSIDAD DE PUERTO RICO RIO PIEDRAS r

~•s►~ ►~y

~" .~~.e~;,,~,~~.~

SISTEMA DE BIBLIOTECAS

U..P.R.

RIO PIEDRAS

OCT 0 5 2021

FOREWORD The people of Puerto Rico, through their representatives in the Insular Legislature and through the public agencies of the Island, have formulated and are endeavoring to put into practice a program of wide social significance. Its purpose is to grapple, in a mountainous island loo mileslong and 35 miles wide, with the fundamental social and economic problems of two million people. who are imbued with the standards of the western world, but who live below those standards. It is clear that achievement has so far fallen short of objective. It is .equally clear that progress has been made. The program has not been developed at one sweep and in many ways is frankly experimental. Together with mistakes, there are many promising signs. No fair and objective assessment ,of the present stage of development is available now either to policy-makers or to the' public. The University of Puerto Rico is interested in making available' data necessary for such an assessment. It has established a Social Science Research Center to study, find out, and divulge the nature and conditions of the social and economic problems of Puerto Rico. This study of Balance of External Payments of Puerto Rico, 1942-1946, by Robert L. Sammons and Belén H. Cestero, is one of a series of reports prepared under the auspices • of the Uni-. ver..sity's Social .Science Research Center to provide data on basic aspects of Puerto Rico's life and economy. Robert L. Sammons is chief, International Economics Division, Office of Business Economics, United States Deparinnent of Corn-. merce and one of the country's leading authorities in the field. Miss Belén H. Cestero served on the staff of the Social Science Research Center until July 1, 1947, when she transferred to the Division of Statistics of the Bureau of the Budget where she wi1T continue to work on balance of payments and income estimating. We are hopeful that this report will facilitate understandingof the character of the insular economy and that it will assist: in the making and administering of public policy.

~ ~

é ~ ~~

University of Puerto Rico May, 1948.

JAIME BENÍTEZ,

Charmcellorr3'

ACKNOWLEDGMENTS The authors express their appreciation to the many individuals and organizations who have cooperated in gathering the data on which this report is based. The International Economics Division and the Clearing Office for Foreign Transactions, both of the Office of Business Economics, United States Department of Commerce, were of great assistance—particularly with respect to securing information regarding Federal Government expenditures and receipts in Puérto Rico. The manuscript was read and criticized by Mr. Juan Labadie, Chief of the Division of Statistics of the Bureau of the Budget, and Mr. Sol Descartes, of the Planning Board. Mr. Roberto de Jesús, Director of the Bureau of the Budget also, cooperated in making this' study possible. ROBERT L. SAMMONS BELÉN H. CESTERO

I 4

CONTENTS PAGE

Foreword Acknowledgments Chapter 1. Summary The Concept Importance of Balance-of-Payments Data The Position of Puerto Rico Summary of the War Period Chapter II. Definitions and Concepts Transactions Included Classification of Accounts Chapter III. The External Accounts Merchanside Trade Ocean Transportation Travel Remittances Federal Government Expenditures Income on Investments Miscellaneous Services Long-Term Capital Movements Short-Term Capital Movements The Balancing Items Errors and Omissions Chapter IV. Methodology and Sources of Data Merchandise Trade Ocean Transportation Travel Expenditures Personal and Institutional Remittances Federal Government Expenditures Income on Investments. Miscellaneous Services Capital Transactions Balancing Items 5

3 4 7 7 7 8 9 11 13 14 17 17 23 26 28 29 35 4d 41 44 47 48 50 50 53 55 56 _ . . . 57 57 59 61 64

TABLES PAGE

TABLE

1 2 3

Balance of external páymentá of Puerto Rico, 1942Facing page 46 9 External merchandise trade of Puerto Rico, 1942-46 18 Principal exports. of Puerto Rico to the United_ States, 1942-46 19

.Indexes. of value and quantity of. Puerto .Rican exports and imports, 1942-46 20

5 6

Ocean transportation account,. 1942-46 . . . .. . . ... . . Fare payments to non-insular carriers, 1944-46

Expenditures for overseas travel by residents of Puerto Rico, 1942-46

23 25 27

Expenditures of nonresident visitors in Puerto Rico 27 1944-46

32 Federal expenditures in Puerto Rico, 1942-46 Income on externally-held investments. in Puerto Rico, 1942-46 36

10 11

Income on Mainland- sugar companies operating 37 in Puerto Rico, 1944-46

Income on externally-held direct investments in 38 Puerto. Rico, other than sugar, 1944-46

13 14

Interest paid to Federal Government agencies, 194239 46 Income on Puerto Rican investments abroad, 1942-46 40

Miscellaneous services, 1942-46

Lending activities of Federal agencies, 1942-46

Capital transactions, in the balance of external pay45 ments, 1942-46

CHART Net income and imports of Puerto Rico, 1930-46. . . . 6

CHAPTER I SUMMARY The Concept In common usage a balance of international, or external, payments is a statement of all transactions during a given period involving payments between residents of one country or area and residents of all other countries or areas.1 Such a statement includes not only a record of the exchange of goods and services (the latter are sometimes called "invisible" exports and imports), but also purchases and sales of claims, or capital assets, such as bonds, stocks, notes, bank deposits, and other evidences of debt. The term is also used to denote the excess of exports of goods and services over imports thereof, or vice versa. It is in this sense that the terms "favorable" and "unfavorable" balance of payments have come to' be used, and to mean the same as "balance of trade," except that the balance of payments includes services as well as "visible" merchandise trade. An excess of exports is still commonly referred to as a "favorable" balance of payments, although whether such a condition is favorable in the ordinary meaning of the word depends upon 'all the factors in the general economic situation of the country and not solely upon the status of its balance of payments. Importance of Balance of Payments Data balance The of payments and the national income are probably the two most important measures of the total economic activity of a .country, the latter in its internal and the former in its external aspects. No country in the world can afford to ignore the effect of any proposed .political or economic policy on the welfare of .its people, as measured by the national income, or on its external financial position, as measured by the balance of payments. Nor can either of the two factors be considered without the other; a full employment policy in Great Britain, for instance, must take into account the ability of that country to finance the imports necessary to maintain the policy, as well

1 For a more detailed description of what constitutes a balance of external payments statement, see Chapter II. 7

as the imports which the population will want to buy at any given level of national income. Fundamentally, however, balance of payments difficulties are merely evidences of more basic troubles in the economy. Specifically, if a country needs to import more than it exports—as is presently.the case with most of the countries of Western Europe —that is evidence that it cannot produce at home enough for current consumption and necessary capital investment. This may be due to a more or less permanent disproportion between population and resources, or to temporary reductions in productive capacity as a result of war or of great natural catastrophies. In either event, a country is faced with only two choices; either it must reduce consumption and/or capital investment, or it must draw on outside aid (or liquidate its foreign capital assets) to finance the necessary import surplus. The Position of Puerto Rico The dependence of an area on external transactions for its economic well-being is apt to be a reverse function both. of its size and of the extent and variety of its natural resources. In view of the preponderance of sugar and its by,-products in the economy of Puerto Rico, it is not surprising that in 1939 Puerto Rico spent 42 percent of its income on imported goods, and that its exports of commodities alone were equal to 44 percent of the insular income. For the years that complete balance of payménts data are available, 1942-46, the average ratio of total exports •of goods and services to insular net income was 62 pércent. This can be taken as a rough measure of insular income originating from, and hence dependent on, external transactions. A well-known feature of these external transactions deserves reiteration here, since it can be supported by actual figures. Reference is made, of.course, to the special political relationship to the United States, which results in: (1) access to United States markets on a duty-free basis of Puerto Rican products, especially sugar and its by-products; (2) the refund of United States excise taxes and customs duties to the Insular Government; and (3) large expenditures by the Federal Government in the Island, including agricultural benefit payments, relief expenditures, and military disbursements. The dependence of the insular economy on external transactions is hence all the more significant in the

d d

1942

Transactions Credits C urrent transactions: Merchandise trade Transportation Travel Personal and institutional remittances Federal Government Income oninvestments Miscellaneous services -

Debits

1943 Balance

Credits

Debits

1945

1944 Balance

Credits

Debits

TABLE 1 Balance of External Payments of Puerto Rico, 1942-46 (A plus sign (+) (credit) indicates an inflow of funds; a minus sign (—) (debit) an outflow) (In thousands of dollars)

Balance

Credits

Debits

1946 Balance

Credits

Debits

Balance

103,205 154,660 -51,455 88,289 116,698 -28,409 144,523 171,431 -26,908 121,759 185,367 -63,608 166,979 260,549 -93,570 7,313 13,481 -6,168 7,896 18,926 -11,030 10,029 25,428 -15,399 9,843 20,,846 -11,003 7,834 18,676 -10,842 -29 1,581 1,796 -215 3,392 3,605 -213 500 3,540 -3,040 1,531 1,560 500 3,099 -2,599 2,940 9,504 7,202 +2,302 5,975 -3,968 4,099 -1,159 7,799 4,844 +2,955 7,969 4,719 +3,250 2,007 8,652 +176,334 3,753 +143,682 158,904 7,344 +151,560 156,757 7,377 +149,380 184,986 3,474 +118,160 147,435 . . . 121,634 1,063 3,287 11,916 -8,629 574 8,961 -8,387 9,123 -8,060 2,508 11,960 -9,452 4,458 8,553 -4,095 5,342 -8,977 4,602 -4,146 293 3,337 -3,044 1,073 4,813 -3,740 1,365 456 993 4,747• - 3,754

Total, current transactions Capital transactions: Long-term capital movements involvingChanges in outside assets in Puerto Rico Changes in Puerto Rican assets abroad

238,219 201,617 +36,602 247,833 154,031 +93,802 324,092 220,562 +103,530 300,322 234,914 +65,408 380,713 319,331 +61,382 +229 -2,245

-8,669 -10,928

=1,878 -17,603

+7,945 -73,416

-7,745 -10,834

-2,016

-19,597

-19,481

-65,471

-18,579

-739

-1,037

+6,494 -1,620

+15,047 -5,308

-8,i83 +1,711

-739

-1,037

+4,874

+9,739

-6,972

et capital movement

-2,755

-20,634

-14,607

-55,732

-25,551

Balancing" items: Net inflow of United States currency Net change in bank bálances (see text)

-21,388 -18,985

-28,817 -46,698

-14,807 -79,032

-13,789 -2,500

-19,706 -14;794

fet movement of "balancing" items

-40,373

-75,515

-93,839

-16,289

-34,500

+6,526

+2,347

+4,916

+6,613

-1,331

Net flow of long-term capital Short-term capital movements involvingChangesin outside claims on Puerto Rico Changes in Puerto Rican assets abroad

Errors and omissions • Revised.

Net flow of short-term capital

light of the peculiar politico-economic relationships under which ' these transactions are conducted. Summary of the War Period in every year since 1940, the island of .Puerto Rico has imported more merchandise than it has exported, the deficit reaching the unprecedented figure of $94 million in the fiscal year ended June 30, 1946 (see table 1). The cumulative excess of imports for the five fiscal years ended on that date was over $270 million. Total imports reached an all-time high of $261 million in 1946, about 2½ times the previous peak in 1921, and almost five times as great as in the depression year of 1933. Despite this large excess of payments on merchandise account, and other net payments for invisible imports such as travel, shipping services, and income on investments, Puerto Rico was able to repay debt and build up reserves in the form of United States Government bonds, currency holdings, bank balances, and other external assets in the combined amount of $380 million during the same five-year period. The answer to this apparent anomaly lies, of course, in the tremendous expenditures of the Fedéral Government in the Island during the war period. Including excise tax refunds, these expenditures amounted to about $739 million for the five years, or approximately $74 per year for every man, woman and child in Puerto Rico. War-time influences are apparent in almost every phase of Puerto Rico's external transactions. The shortage of distilled beverages on the Mainland greatly enhanced the market for Puerto Rican rum, leading to unprecedented receipts of Federal excise taxes by the Insular Treasury, which reached a peak of $65.9 million (over 90 percent on rum) in 1944, compared with a prewar average (1937-39) of about $1.4 million. Over the fiveyear period, the Army, Navy, and special wartime civilian agencies, such as the Office of Censorship, accounted for 66.25 percent of the direct expenditures of Federal agencies in the Island (see table 9). Shortages of supplies an the Mainland and, for part of the period, shipping difficulties, served to keep imports much lower than they would undoubtedly have been at the achieved level of insular income (see chapter III) . Ocean freight rates rose even 9

New

faster and' higher than commodity prices, leading 'to an increase in the ratio of freight to the total value of imports. The large movement of people between the Island and York City was almost completely suspended when passenger vessels stopped running after Pearl Harbor, and was not resumed until after the end of the war, when expanded plane service again provided ample facilities for trans-ocean travel. This study closes with the fiscal year 1946, during the first two months of which the United States was still at war. During this year Federal expenditures reached an all-time' peak of $176 million (net) , largely as a result of mustering-out pay to servicemen and readjustment allowances to ex-servicemen paid by the Veterans Administration. On the other hand, merchandise imports also reached a record total of $261 million, with a net 'deficit on visible trade of $94 million. 'Imports would undoubtedly have been larger if it had not been for supply difpi'culties in the United States; the total actually reached was not 'out of line with the previous relationship to insular income, in spite of the undoubtedly large backlog of demand created by the 'shortages of the war years. Probably a significant portion of the imports in the first two postwar years represented purchases for inventory rebuilding 'and for capital expenditures held back by the war. If this is true, some decline in the net import surplus of merchandise can be expected, especially if sugar prices maintain their present level. With a sharp increase in emigration 'to the Mainland in recent months, an expansion in personal remittance receipts might also be anticipated as a factor increasing the external income of the Island. Then, of course, there is the perennial possibility of doing something about the tourist industry. None of these possibilities of increasing "exports" of services, however, seem to be large enough to offset any great decline in Federal Government expenditures, which would therefore seem to involve inevitably a corresponding decline in 'the real consumption (or income) of the Island.

CHAPTER II DEFINITIONS AND CONCEPTS

into

Any individual or group of individuals, such as a nation, can consume more goods and services than it produces during a given period, only if the excess is given to it, or if it borrows, or if it draws on previously existing assets.2 On the other hand, if they produce more than they use or invest 3 at home, they must either -give the excéss away, lend outsiders the money to buy it, or use -the proceeds from the sale thereof to pay off debts. Essentially a balance of payments statement measures the extent to which -this occurs, that is, whether a country's exports of goods and •services exceed its imports or vice versa,, and how the excess is financed—whether by gifts, loans, or repayment of debt. Thus, if all the transactions could be accurately measured, the accounts would be exactly in balance; a net excess of exports or imports •of goods and services would be offset by net capital movements ;and gifts of an equivalent amount. By custom, and because it is logical from an economic viewtwo main point, external transactions are usually divided 'categories: current transactions and capital transactions. The latter are then subdivided into long-term and short-term capital movements. Long-term capital movements include the purchase or .sale of: (1) fixed assets, (2) securities of a maturity of more than one year, and (3) stocks. All other capital movements, chiefly movements of bank balances, are classified as short-term. In an international balance of payments, gold movements are usually placed with short-term capital movements, since they -both represent the coin- in which final settlement of the international accounts is effected. Technically a third major type of transaction needs to' be recognized, namely gifts, or as they are referred to in the official United States balance of payments statistics, unilateral transfers. These may be of two kinds: ('1) goods, services, or capital assets given away without any provision for repayment, past, present, or future; and (2) transfers of cash, i.e. money gifts, 2 Including inventories. S The term "invest" is-here used to include the accumulation of inventories.

under similar circumstances. Unilateral transfers include, among others, such items as personal remittances, missionary contributions, lend-lease, relief activities, and reparations. For various• reasons, no attempt has been made to separate such transactions from other current items in the Puerto Rican balance of payments. All money received from the Federal Government, for instance, has been treated as if it represented. the purchase of goods or services from the Island. This report covers transactions between the Island and the outside world. Obviously, such transactions are conducted by' persons or organizations resident in the Island, including governmental organizations. All persons ordinarily domiciled in the Island are considered residents thereof, whether natives or not. Conversely, Puerto Ricans residing in the Mainland or elsewhere are not residents of the Island for balance-of-payments. purposes. Insular and municipal governmental units are, of course, residents, as are insular-incorporated companies and the Puerto Rican branches of outside companies.¢ Agencies of the: Federal Government are not considered insular residents; all moneys spent by such agencies become credit entries in the balance of payments of the Island. The personnel of such agencies, except for the armed forces, are treated as insular residents, whether they are Puerto Ricans. or Continentals. As has already been indicated, if all transactions were accurately recorded, the balance of payments statement would have to be in balance. This follows from the dual nature of every transaction, which, as in double entry bookkeeping, has a debit and credit phase. Transactions, such as exports, which involve or would presumably involve a payment in money to the. Island are termed credits; as in bookkeeping, credits involve either a decrease in assets or an increase in liabilities. For example, a shipment of sugar from the Island to the Mainland is a credit.. It involves a payment to the Island for the sugar, and it also involves a reduction in an insular asset, namely, its stock of' sugar. Similarly, an increase in Federal Government deposits• in insular banks is a credit; it involves a flow of funds to the Island and results in an increase in the external liabilities of Puerto Rico. 4 An outside company is considered to have a branch in Puerto Rico if it: is required to file a regular corporation income tax .return.

Conversely, imports are debits; they involve a payment from the Island to the foreign exporter, while also increasing the Island's assets, i.e. its stock of merchandise. Increases in insular holdings of United States Government bonds. are also a debit; they represent an increase in the Island's assets and also a flow of funds from the Island in payment for the bonds. Similarly, a decrease in noninsular deposits in local banks is a debit; a flow of funds from the Island is accompanied by a reduction in liabilities to outsiders. One or two further examples will illustrate the principle that every debit is accompanied by an equivalent credit, and vice versa. Suppose an export of sugar from the Island is paid for by the Mainland importer with a check, which is deposited to the New York account of a Puerto Rican bank, the latter, of course, crediting the local exporter on its books. As far as Puerto Rico is concerned, the export was a .credit entry in the balance of payments, while the increase in Puerto Rican bank balances in New York was a debit. Actually, one asset has been exchanged for another, sugar for balances in New York banks. Again, let' us suppose the Island imports United States currency, which for balance-of-payments purposes has to be treated as a peculiar type of external asset. It is perhaps easiest to understand if thought of as a type of United States Government security. Since the external assets of the Island have increased, the import of the currency is entered in the balance of payments as a debit, the same as any other import. The offsetting transaction is most likely to take the form of increased Federal 'Government deposits in insular banks, and we credit this increase in external liabilities. Later the account may be drawn down to pay Federal expenses in the Island, in which case we credit Puerto Rico for such expenditures (the asset decreased in this case might -be the services of Federal employees here; as with all services, they are consumed at the moment of their creation) and debit the reduction in a liability—the Federal deposit account. Transactions Included There are two general concepts that may be applied in determining what transactions to include in a balance-of-payments statement. 13

The first and narrower of the two includes .only transactions, involving money payments. between residents of one country and residents of all other countries. The broader concept, and the one employed in this study, is less capable of exact definition. Besides embracing all transactions comprehended by the first: principle, it includes those involving transfers of physical goods• or services without an immediately accompanying monetary pay ment. Under this concept, charitable contributions made in. the• form of merchandise, or exports of machinery to set up a. branch factory abroad, for instance, are included in the balanceof payments. In each of these examples the export of merchandise is entered as a plus, or receipt, item, and the charitable contribution, or outflow of capital, as a minus,, or payment item. The advantage of the latter method of approach lies in its completeness; ordinarily, the transfer of any real goods or services from one economy to another is reflected in the balance of payments. All disbursemnts of the Federal Government in the .Island (except capital items) have been included in the current. account as exports of services, with one exception: the disbursements of the War and Navy Departments have been entered on a net basis_ This is, equivalent to treating the personnel of such agencies as. nonresidents of Puerto Rico, since money collected from them by the Army and Navy has not been entered in the balance of payments statement. Such collections include various items, chief of which are money orders sold in Army post offices, sales to Army personnel, deductions from pay for retirement, payments to dependents, and other purposes, and the net amount of funds remitted from the Island by the post exchange system. The' remaining net figure is therefore an approximation of the amount spent in the local economy by the armed forces as such and by their personnel, including their Puerto Rican personnel. While this procedure is not consistent with the treatment of other Federal agencies, it was dictated by the nature of the basic information available. Classification of Accounts As will be seen by reference to table 1, all transactions have been grouped under three headings: (1) current transactions,, 14

(2) capital transactions, and (3) "balancing" items. The last two categories are not mutually exclusive;' the balancing items are, strictly speaking, movements of capital, as discussed below in more detail. Current Transactions This group, also frequently referred to as transactions in goods and services, includes all exports and imports of merchandise and services, the latter also frequently referred to as "invisible" exports or imports, as distinguished from merchandise, which is "visible." A detailed, description of the items included appears elsewhere in this volume. It should be noted again, however, that this category includes the so-called unilateral transférs; transactions which strictly speaking dó not represent the transfer of goods or services. The most conspicious example would be the excise taxes refunded to the Insular Government on Puerto Rican products sold on the Mainland; similar items include personal remittances from insular residents to their relatives abroad and vice versa, and expenditures in the Island of missionary and charitable institutions. Federal grants-in-aid to Insular Government agencies are a borderline case, but would probably be more properly classified as purchases of services than as unilateral transfers. Capital Transactions and "Balancing" Items Theoretically, it is logical to divide capital movements into those transactions which are more or less autonomous in nature and those that are more the passive results of all autonomous transactions in the balance of payments, whether on capital or current account. Actually, of course, few if any transactions are completely autonomous, all being interrelated in some way or other. For purposes of this study, the "balancing" items are taken to include: '(1) all external assets of the banks (including Puerto Rican branches of outside banks) ; (2) accounts of Puerto . Rican branches of outside banks with their home offices and nonPuerto Rican branches; and (3) movements of United States coin,

and paper currency.6 All other acquisitions or dispositions of Puerto Rican claims on outside persons or institutions, and vice: versa, are entered under the heading "Capital Transactions." Errors and Omissions This last item is the net error in all the estimaties, and has. been given the sign necessary to bring the accounts into balance.. In other words, in the years 1942-45, the outpayments (debits) have been overestimated or the inpayments (credits) have been underestimated, or both, with the reverse situation prevailing in 1946. There will be found in chapter III a brief discussion. of those items which the compilers feel are most subject to error.. e This differs from the classification used in the previous study, Robert L.. Sammons, The Balance of External Payments of Puerto Rico, 1941-42 and 1942-43, University of Puerto Rico and Office of the Governor (advanced mimeograph version), San Juan, April, 1945, where investments by Puerto. Rican banks in United States Government bonds were considered as "capital. movements" rather than "balancing items." It was acknowledged at that. •time (pp. 72-73) that the treatment now adopted was perhaps more logical, and the earlier figures have been rearranged in the same fashion throughout this volume.

CHAPTER III THE EXTERNAL ACCOUNTS In this section the various items in the balance-of-payments statement will be, discussed in some detail, in the same order as they appear in table 1. Supplementary data will be presented where appropriate, and some analysis attempted. A description of the sources of data and methods of estimating has been reserved for chapter IV. Particular note should be taken that, although data for 1942 and 1943 are shown in the tables, they may not always be comparable with the 1944-46 figures. Except in one instance, income on external direct investments in the Island, no attempt was made to revise the estimates presented in the previous study. All years. are fiscal years ended June 30, unless otherwise clearly indicated. Merchandise Trade All countries are to a greater or lesser degree dependent on foreign, or external, trade for their economic well-being. The greater the degree of specialization of production, the more the dependence. Puerto Rico has traditionally produced only few major crops, chiefly sugar and its by-products, tobacco, and coffee, and exchanged these products—mostly with continental United States—for food and manufactured goods. In view of the structure of Puerto Rican production, therefore, it is not surprising that external trade plays such an important part in the insular economy. The Trade Balance During each of the five fiscal years under study, Puerto Rico had a large excess of merchandise imports (see tables 1 and 2), and this in spite of the fact that exports, in the last three years, were substantially higher than at any time since 1920. As already indicated, the Island was able to finance this huge deficit only because of the equally unusual expenditures of Federal Government funds, mostly .by the War and Navy Departments for military construction and pay of troops. As a 17

TABLE 2 External Merchandise Trade of Puerto Rico, 1942-46 (In thousands of dollars) Item

1942

1943

1944

1945

1946

Exports: As recorded, to the United States As' recorded, to foreign countries Adjustment for sugar valuations Less household goods

104,528 1,795 -3,118 (~)

88,256 3,990 -3,957 (4)

133,482 14,253 -2,964 -248

116,204 2,116 +3,876 -437

162,194 3,826 +1,580 -621

Adjusted total

103,205

88,289

144,523

121-,759

166,979

140,786 11,449 (>) 2,425 (~) (~)

64,697 19,096 30,128 (~) 2,777 (~) (~)

112,299 16,480 42,566 3,279 2,096 -231 -5,058

123,904 17.,429 41,392 2,387 2,284 -410 -1,619

218,691 23,411 14,984 2,168 3,302 -1,271 -736

154,660

116,698

171,431

185,367

260,549

Imports: As recorded, from United States As recorded, from foreign countries Federal Government, for sale Federal Government, for free distribution Parcel post Less household goods Less adjustment for overvaluation of cigarette imports Adjusted total a Not, calcul~tgd,

TABLE 3 Principal Exports of Puerto Rico to the United States, 1942-46 Thousands of dollars Item

Total exports to United States Sugar and related products, total Sugar Rum Textiles and products (needlework) Tobacco and manufactures Coconuts, in the shell or processed Fruits and preparations... Other

1942

1943

1944

1945

1946

104,534

88,256

133,482

116,204

157,633;

73,365 59,309 13,077

67,057 56,669 9,578

97,768 60,809 34,926

57,249 41,372 13,927

93,933 77,574 12,487

12,012

6,938

17,422

21,004

25,540

10,805

9,588

7,881

22,296

21,40a

463 1,359

546 946

1,742 1,785

2,440 2,676

4,031 3,771

6,530

3,181

6,884

10,539

8,955

Percent Item

1942

1943

1944

1945

100.0

100x0

100.0

100.&

70.2 56.7 12.5

76.0 64.2 10.9

73.2 45.6 26.2

49.2 35.6 12.0

59.ír 49.2 7.9

11.5

7.8

13.1

18.1

16.2

10.3

10.9

5.9

19.2

13.6•

.4 1.3

.6 1.1

1.3 1.3

2.1 2.3

2.5• 2.4

6.3

3.6

5.2

9.1

5.7

1946

matter of fact, it seems apparent that the deficit was caused by the Federal expenditures, which raised the insular income and hence the demand for external goods. Before the era of large Federal outlays, the Island had almost always had an export surplus on merchandise account, employing the fiends thus provided to offset, at least in part, a chronic excess of imports of services —principally shipping and income on investments. The Behavior of Exports There is little to be said about Puerto Rican exports that is new. As shown in table 3, sugar and related products made up well over 50 percent of total exports in the five fiscal years under, study, while five groups of items listed accounted for over 90 percent of the total shipments during the period. Some of the fluctuations during'the war period may be noted. The small sugar crop in 1945, coupled with a sharp decline in rum shipments from $34.9 million in 1944 to $13.9 million in 1945 "(exclusive of excise tax refunds), more than accounted for the decline in total exports in that year. Needlework shipments reached an all-time peak of $25.5 million in 1946, but it must be remembered that a substantial part of such shipments consists of the cost of raw materials and hence is not actually a Puerto Rican product. Significantly, tobacco exports rose sharply in 1945 and 1946, reaching levels not achieved since the late 1920's. Exports of fruits and nuts, mostly in prepared or processed form, reached a combined total of $7.8 million in 1946. Most of these shipments consisted of processed items, an evidence of an expanded processing industry in the Island. TABLE 4 Indexes of Value and Quantity of Puerto Rican Exports and Imports, 1942-46 Item Exports: Value Quantity Price Imports: Value Quantity Price

1942

1943

1944

1945

1946

100 100 100

86 83 103

140 118 118

118 87 136

162 122 133

100 100 100

75 70 108

114 104 110

121 109 111

169 148 114

• Calculated on the assumption that the wholesale price index of the Bureau of Labor Statistics, U. S. Department of Labor, is representative of the price of Puerto Rican imports. 20

A substantial portion of the increase in dollar value of exports during this period, of course, was accounted for by price rises. In terms of 1942 prices, for instance, exports in 1946 were onlyabout 22 percent above 1942, while export prices were apparently up about 33 percent (see table 4) . Imports The student of Puerto Rican trade during the war years is greatly handicapped by lack of quantity and value data, by commodities, for Department of Agriculture shipments comparable to shipments through regular commercial channels compiled by the Bureau of the Census. The former amounted to almost 25 percent of total imports in 1944 and 1945, and were concentrated almost entirely in foods and feedstuffs, fertilizers, and a few other essentials. In the absence of these data, the present analysis is confined almost solely to overall totals. Imports into Puerto Rico are usually closely related to insular income, as indicated in chart 1. The line of regression shown in the chart was computed on the basis of data for the years 193042, inclusive. The equation of the regression line, y = —10.04 ± .476x (where y = imports and x = income, both in millions of dollars), indicates that for every increase of $1 million in insular income, imports could be expected to increase by about $476,000, which represents the marginal propensity to import during the period in question. The effect of shipping shortages and scarcity of materials in the United States was not seriously felt until 1943r when imports fell short of the normal relationship by about $84 million. The "deficiency" in 1944 was about $50 million. It is significant that imports in 1945, at the not-previouslyexceeded peak of $185 million, were still apparently less than the. Island would have wished to purchase at the attained level of insular income. Even the much higher figure of $261 million reached in 1946 was only slightly above the prewar relationship, in spite of the presumed existence of a large backlog of waraccumulated demand. Note: For more extended discussions of the external trade óf Puerto Rico, its commodity composition, and its relationship to the economic welfare of the Island, the reader is referred to Puerto Rico's Economy with Special Reference to United States-Puerto Rican Trade, U. S. Tariff Commission, 1943. 2]

CHART 1

NET INCOME AND IMPORTS OF PUERTO R/CO, 1930-46 30

/•46

• 1~45 1944 1942

1941 100

50 1i

193.3

1940 193?' 1938 1930. • 1931 183939 •195 1932 19334 250

•

1943 ~

300

350

400

NET INCOME (8 MILL%ÓN)

450

500

550'

600

Puerto Rico's Economy: Characteristics, Trends and Recent Developments (Preliminary Report), Harvey S. Perloff, 1947. Ocean Transportation In the virtual absence of insular-owned steamships and air facilities, Puerto Ricans make large net external payments for the carriage of merchandise and passengers. Merchandise imports are shown in this statement at an f.a.s. value; the freight (and, in most cases, the insurance) on such shipments from the port of lading to Puerto Rico constitutes an additional external payment to be made by the Island—except in the relatively few instances where such imports arrive in Puerto Rican vessels or planes. Similarly, insular residents, traveling overseas, either as temporary visitors or emigrants, must, in the main, purchase their passage from mainland air or steamship companies. A substantial offsetting receipt occurs in the form of. expenditures in the Island by these companies (mainly for stevedoring) and their crews. These, and other transactions in the ocean shipping account, are discussed in the following paragraphs. TABLE 5 Ocean Transportation Account, 1942-46 (In thousands of dollars) Item

1942

1943

1944

1945

1946

10,452 2,630

14,201 2,895

15,387 1,105

16,378 936

399

(a) (_)

761 798 21

1,326 1,083 25

2,54g 5,418 153

20,846

13,481

18,676

18,926

25,428

2,580 70

1,640 100

1,478 51

1,445 58

1,08 98

7,193

5,573

4,593 382 1,228 102

4,805 519 938 131

6,293 1,029 1,303 217

9,843

7,313

7,834

7,896

10,.029

Payments: 17,504 Freight on imports 2,760 Marine insurance on imports, Passenger fares: 582 By travelers .. (a) By emigrants Shore expenditures (.) Total jayments Receipts: Marine insurance on exports Passenger fares' Shore expenditures of: Steamship companies Air companies Steamship crews. Air crews Total receipts • Not estimated. 23

Freight on Imports Freight costs added somewhat over 8 percent to the total cost of Puerto Rican imports in 1944 and 1945, under the impetus of high war-time freight rates. With the end of hostilities, further rises in the cost of the commodities themselves joined with reduced freight rates 6 to bring the ratio of freight to value down to 6.33 percent. This proportion is much lower than for the United States as a whole (which was 17.4, 17.6, and 13.9 percent in the calendar years 1944, 1945, and 1946, respectively), in spite of the fact that a portion of United States imports is carried in lower-cost foreign vessels. Marine insurance on imports, assumed to have been placed entirely abroad, amounted to somewhat over one percent of the f.a.s. value of the goods insured during the period under study, and thus added to the cost of external purchases. By the end -of 1946 rates were down to about .36 percent, including war risk, compared with a peak of 15 percent in 1942, at the height of the submarine activity. Passenger fare payments to United States and foreign ships and airlines rose rapidly during 1945 and, especially, 1946. Increased transportation facilities after the end of the war made possible the resumption of the large-scale movement of peoples between the Mainland and Puerto Rico which had been suspended during the war. These fare payments amounted to $7,961,000 in the 1946 fiscal year, $5,418,000 of which was apparently spent by emigrants and the remainder by insular .residents making temporary visits overseas (see table 6) . The only significant income received by the Island in connection with the ocean transportation account is represented by the disbursements of the carrying companies and their crews (see table 5) . The largest single component of these disbursements is stevedoring, which accounted for 28 percent of the total disbursements of steamship companies during the three-year period. Also included are bunker fuel sales, office expenditures of steamship companies, harbor fees, pilotage, agency commissions, and other miscellaneous expenses. Care should be taken not to consider the difference between 6 Actually, basic freight rates were not raised during the war, but a system of surcharges was imposed, which varied with the course of, and nearness to, actual hostilities.

TABLE 6 Fare Payments to Non-Insular Carriers, 1944-46

Class of traveler, method of travel, and destination Round trip travelers, total. . . . By sea, total To the Mainland To the Virgin Islands To foreign countries ~ 01 By air, total To the Mainland To the Virgin Islands To foreign countries Emigrants

No, of passengers

Average fare (dollars)

Total fares (thous. dollars)

No. of passengers

287 3 5,195 4,133

150

3 (°) 758 620

1,062

129

138

9,412 609 252 348 9 8,803 7,358 18 1,427

798

11,535

5,485 290

761 3 12 36

8,934

1946

1945

1944

Average fare (dollars)

130 12 36 150 14 129

Total fares (thous. dollars)

No. of passengers '

1,326 37 33 4 (a) 1,289 1,104 (>) 185

19,045 5,431 4,896 415 120 13,614 10,654 737 2,223

1,088

30,018

Average fare (dollars)

130 12 36 150 14 129

Total fares (thous. dollars) 2,543 646 637 5 4 1,897 1,598 11 288 5,418

By sea, total To the Mainland To the Virgin Islands To foreign countries

2,623 2,344 249 30

75 6 20

178 176 1 1

1,812 1,536 227 49

75 6 20

117 115 1 1

4,249 4,141 108

75 6

312 311 1

By air, total To the Mainland To the Virgin Islands To foreign countries

6,311 5,715

101

620 577

9,723 9,370

101

971 946

596

353

25,769 25,438 . 41 290

101 8 72

5,106 5,085 (°) 21

> Less than $500,

freight paid on imports and receipts for port expenditures as the. external cost resulting from the fact that substantially all the Island's trade is carried in "foreign" vessels. The real cost represents the difference between the net external payments made under the "present situation and those that would be made if the Island carried all of its foreign trade. In the latter situation, the insular economy would, of course, save the freight it now pays to "foreign" vessels and, in addition, earn the freight on its exports. Against these gains, however, would have to be offset the expenditures now made by "foreign" vessels and their crews in Puerto Rican ports plus the disbursements which the Puerto Rican ships would have to make abroad. Incidentally, even under the present situation, a larger amount of income could be conserved for the Island if more Puerto Ricans were employed as members of ships crews. Travel As discussed more fully in chapter IV, the data available regarding travel of Puerto Ricans abroad and of nonresidents in Puerto Rico leave much to be desired. The estimated number of travelers and their average and total expenditures are shown in tables 7 and 8, with a breakdown between travel exchanged' with: (Y) continental United States, (2) the Virgin Islands, and (3) foreign countries. As has already been indicated in the discussion of the transportation account, the relaxation of wartime barriers to passenger movements led to a tremendous increase in the number of insular residents traveling to the Mainland, and a similar, but generally smaller, increase in other segments of Puerto Rican travel. This rise in travel to the Mainland, in the judgment of those familiar with the travel movement, consisted almost entirely of low-income groups, whose spending was assumed to be far lower than the predominantly business travel in the earlier war years.

TABLE 7 Expenditure for Overseas Travel by Residents of Puerto Rico, 1942-46

Destination

Number f traveler

1942 Mainland Virgin Islands Foreign

Total expenditures Average (thousand expenditures dollars) (dollars)

2,83 3,593 1,331

1,021 23 109

2,872 82 145

7,737

401

3,099

1,701 2,538 627

2,000 24 125

3,402 60 78

4,866

728

3,540

4,133 4,192 1,071

300 51 100

1,240 213 107

9,396 _

166

1,560

7,610 3,372 1,436

195 50 100

1,484 168 144

Total 1946 Mainland Virgin Islands Foreign

12,418

145

1,796

15,550 5,227 2,343

200 50 100

3,110 261 234

Total

23,120

156

3.,605

Total 1943 Mainland Virgin Islands Foreign..... . Total 1944 _Mainland Virgin Islands Foreign Total 1945 Mainland Virgin Islands Foreign

TABLE 8 Expenditures of Nonresident Visitors in Puerto Rico, 1944-46

Travelers from

Number of travelers

1944 Mainland Virgin Islands Foreign Total 1945 Mainland Virgin Islands Foreign

Total expenditures Average expenditures (thousand dollars) (dollars)

4,062 3,730 626

300 50 200

1,219 187 125

8,418

¢182

1,531

3,952 4,124 947

300 50 200

1,186 206 189

Total 1946 Mainland Virgin Islands Foreign

9,023

175

1,581

8,890 7,238 1,815

300 50 200

2,667 362 363

Total

17,943

189

3,392

The increase in travel to the Mainland was not matched by travel to the Virgin Islands and to foreign countries, the latter chiefly nearby Caribbean countries such as Cuba and the Dominican Republic. These areas were more accessible to travelers during the war, and probably received some Puerto Rican travelers who would have gone to the Mainland if they could. The end of the war and the establishment of additional plane services did result in some increases in non-mainland travel, as shown in table 7, but the amounts involved are presumably relatively small. According to the present estimates, travel expenditures are about evenly balanced, with outpayments slightly larger than receipts. The difference, however, is well within the margin of error in the estimates. The possibilities of tourism as an external source of income to the Island—an invisible export—have been frequently discussed, but só far there is no evidence of any substantial inflow of purely pleasure travel from the Mainland. If the high level of national income prevailing in the United States continues, the market for overseas travel is almost certain to be tremendous. Puerto Rico, although part of the United States, is "foreign" to the average American, and should, if proper accommodations at reasonable rates were available, be able to capture some of this business. But, in 1946, only half as many Mainlanders visited the Island as there were Puerto Ricans visiting the States, and the Island is still a long way from a substantial net income position on overseas travel account. Remittances Emigration has long been proposed as one of the possible solutions to the problem of overpopulation in Puerto Rico. While it is usually considered in the light of reducing the pressure on employment opportunities at home, a very substantial balance-ofpayments bene~t could also ensue—the remittances that would be returned by the emigrants to their relatives. in Puerto Rico. In 1946, personal remittances received in the Island, presumably almost entirely from Puerto Ricans living on the Mainland, amounted to $8.5 million, and even this amount is probably an underestimate (see chapter IV). These remittances add to the purchasing power of residents of the Island over and above 28

the amount they earn in producing the "insular net income," and at the same time add to the external purchasing power of the insular economy as a whole. This aspect of Puerto Rican emigration deserves more investigation and consideration than it has apparently received in the past. In a population survey being conducted 'in the Island this (1947) fall and winter, an attempt is being made to find out more about this phenomenon—especially what income classes in the Island receive these funds and what proportion of their total expenditures (or incomes) are represented thereby. Outward personal remittances form a substantial offset to these receipts, especially in 1946 (see table 1) . Based on our sample study, it appears that these outward remittances are mainly to Puerto Ricans resident on the Mainland. These include remittances to students, but probably remittances are also sent to emigrants by their families to assist in their support until they get themselves established in the States. Institutional remittances form a relatively insignificant item in the Puerto Rican balance of payments. Inward transfers, at $707,000, $748,000, and $757,000, respectively, for the last three fiscal years, represent chiefly money received for salaries and - other operating expenses of the various missionary establishments in the Island, the School of Tropical Medicine, the Red Cross, and the U.S.O. The out-payments represent funds collected in the Island in connection with the national fund-raising campaigns of the Red Cross and the National War Fund. Federal Government Expenditures As already indicated, the largest credit item in the Puerto Rican balance of payments is the net expenditure by agencies of the Federal Government. These payments, of course, serve the dual purpose of adding to the income of the Island's population 7 and at the same time increasing the means of external purchasing power available to pay for the increased imports • resulting from the enhanced income. In some cases the increase in incomes occurs directly, as when the Federal Government pays _sa awes o i s e eral disbursements sooner or later increase 'the insular net income almosto the trll-amount 7 See Daniel Creamer: The Net Income of the Puerto Ricatn Economy, 1940-1944, Social Science Research Center, University of Puerto, Rico, Rio Piedras, 1947, p. 29 f'. 29 ~

of the expenditure. Payments to Insular Government agencies, such as the excise tax refunds, are converted into income (or transfer payments) when spent by the Insular Government. Other payments, such as for supplies, rent, and other purchases, become gross income to the immediate recipients and, to the extent imported commodities are not used in the thing purchased, net income to the recipient, his employees, or other residents of the Island. In this report, as in the previous one, Federal expenditures have been grouped into two categories: (1) grants-in-aid and other payments to .Insular Government agencies, and (2) direct expenditures by the Federal Government in the private Puerto. Rican economy. A more significant distinction might have been between: (1) purchases of goods and services, and (2) unilateral, or transfer, payments. This course, however, would have involved making more or less arbitrary decisions fraught with some political implications, and has therefore been avoided. It should be noted that only actual expenditures and receipts; have been included in the tables. Indirect benefits of the peculiar financial relations between Puerto Rico and the United States, such as the Federal income tax that Puerto Rican residents do not pay, have been omitted, partly on theoretical grounds and partly because of the statistical difficulty in measuring them. A balance of payments or income study must deal with conditions as they are; such conditions are obviously the result of all factors in a given situation, including the political relationships between the territory studied and the rest of the world. This is a study of Puerto Rico as it is, not what it would be if, say, it were a state. Grants-in-Aid Under Section 9 of the Organic Act of Puerto Rico, approved March 2, 1917, Federal excise taxes on Puerto Rican products shipped to the Mainland revert to the Insular Government. With the shortage of distilled spirits in the United States during the war, exports of Puerto Rican rum reached unprecedented heights, and the $9 per gallon excise tax thereon accounted for most of the $65.9 milUnn ' e ax refunds in 1944. While this item dropped to $38.6 and $35.3 million, respectively, in the two following fiscal years, it was still, of course, a very significant item in the balance of payments and in the revenues of the 30

Insular Government. It has been, however, a very unstable element, and one that cannot be depended upon—especially since Americans obviously prefer whiskey to rum, and buy the latter in large quantities only when the former is unavailable. The other items in table 9 are mostly self-explanatory. The "free food distributed" by the Department of Agriculture represents the value of food imported for the school lunch program; the value of the food was entered in the merchandise imports as a debit item and offset as a credit in the Federal Government account. Most of the grants listed under the Federal Security Agency and the Labor Department were made under various provisions of the Social Security laws, the main provisions of which—old age pensions and Federal. aid for unemployment insurance—are not applicable to Puerto Rico. Refunds of customs duties are placed at the net amount returned to the Insular Government; the expenses of the local customs service are included in direct expenditures, while the duties collected are shown as a payment by Puerto Ricans to the Federal Government. Except for the excise tax and customs refunds, the. Federal grants-in-aid are all of the type ordinarily available to the various states, but, as has been pointed out elsewhere,$ not all of the grants available in general to the states are available to Puerto Rico. Direct Expenditures In general, these expenses represent the regular administrative expenses of Federal agencies in the Island—chiefly for personal services—and call for no particular comment. These expenditures are in the main relatively small, and of no great significance in the Puerto Rican economy. Three exceptions to this generalization should be noted. First are the payments to sugar growers under the Sugar Act of 1937, designed more nearly to equalize costs between domestic (Mainland and possessions) and foreign producers. Originally designed to compensate in part for keeping production within allotted quotas at a time when the problem was one of excess supplies, they were continued during the war in order to stimulate production. Puerto Rican growers received about $13 mil8 William M. Requa, Federal Expenditures in Puerto Rico, Association of Sugar Producers of Puerto Rico, Washington, 1943, pp. 5-8.

TABLE 9 Federal Expenditures in Puerto Rico, 1942-46 (In thousands of dollars) 1942

Federal agency and fund

1943

1944

1945

1946

(a)

(s)

(e)

I. Federal grants-in-aid, and other payments to Insular agencies: Agriculture, Department of: 103 101 139 139 148: Agricultural experiment stations 202 30a Agricultural extension work 197 281 339 Forest funds, roads, trails, etc 11 15 4 6 1t 909 School milk and lunch program 3,279 2,387 2,16& Free food distributed Federal Security Agency: American Printing House for the 1 1 1 1 Blind I 50 50 50 5a Morril Nelson grant 50 Cooperative vocational education 446 451 349 373 407 and rehabilitation 862 199 (b) 844 244 Training of defense workers 282 286 245 406 321 General health grants 58 170 Control of tuberculosis 340 367 193 313 354 Control of venereal disease 142 122 65 Training of nurses 3. Other Federal Works Agency: 652 603 233. 575 866 Publig Roads Administration 2,462 88 Bureau of Community Facilities. . Interior, Department of: 2 1 Wild life restoration Labor, Department of: Children's Bureau, grants under So368 318 413 488 554 cial Security Act Treasury Department: 13,940 13,550 65,852 38,579 35,263. Refund of excise taxes 1,900 2,150 3,439 Refund of customs duties 17,015 16,913 73,840 48,784 45,377

Total

TABLE 9 (Continued) Federal Expenditures in Puerto Rico, 1942-46 Federal agency and fund

1942

1943

1944

1945

1946

II. Direct expenditures: Agriculture, Department of: 10,755 12,733 14,968 14,203 14,162 Agricúlture adjustment program Commodity Credit Corporation, subsidies 155 8,043 12,492 Farm Security Administration: Grants 338 251 59 22 11 Administrative expenses 351 751 861 718 743 Soil Conservation Service 61 132 170 167 191 Other activities 231 231 460 442 454 Civil Service Commission 4 5 5 4 1 Commerce, Department of 78 61 174 253 340 Employees Compensation Commission 120 106 29 143 98 Federal Communications Commis69 136 107 sion 75 57 Federal Security Agency 2,175 312 693 395 581 Federal Works Agency: 11,115 891 -'4,688 Office of the Administrator 6 67 5 Public Buildings Administration. . . . 42 294 17 12 Public Roads Administration 15 14,862 14,086 5,369 Public works and work relief 23 d508 d53 795 Interior, Department of 776 832 Justice, Department of, and U. S. 266 308 124 135 District Court 147 Labor, Department of, and National 85 115 174 159 Labor Relations Board 221 16 18 Maritime Commission 18 (^) ( a) 182 National Housing Agency 160 313 290 331 673 787 946 1,085 1,800 Post' Office Department a Reconstruction Finance Corporation 17 '119 '110 513 496 640 Treasury Department Veterans' Administration: 5,373 19,817 Benefits to individuals } 1,873 2,045 lJ 1,805 746 821 2,199 Administrative expenses 144 War Assets Administration 60,501 96,697 60,934 74,059 83,993 War agencies g Lending agencies, not elsewhere in247 258 235 256 280 cluded 104,619 130,522 85,064 107,973 139,609

Total Total; all Federal expenditures

121,634 147,435 158,904 156,757 184,986

Not estimated. Less than $500. Negative figure results from recovery of funds advanced to purchase properties of P. R. Railway Light and Power Cómpany. 'Expenditures of P. R. R. A. not included. Includes disbursements of local post offices. Disbursements of Customs Service not included in 1942 and 1943. ncludes War and Navy Departments and special wartime civilian agencies. a

b o

lion under this program .in each of the fiscal years under study. Beginning with the crop year 1944, the Federal Government found it necessary to enable sugar producers to meet increased costs with fixed prices for sugar by making, through the Commodity Credit Corporation, incentive payments to growers and, later, to sugar mills. These payments, shown separately in table 9, added significantly to the total income of the sugar industry, especially in 1945 and 1946. The Sugar Act of 1948 reestablishing quotas for a five-year period sets Puerto Rico's participation in the U. S. sugar market at 910,000 short tons, raw value. This quota is about equal to the average annual amount of sugar produced and marketed over the past five years. As benefit payments are made according to the amount of sugar produced under the quota, it seems that, for the next five years at least, these payments will not be greater than the amount received during the war period. The second important category of Federal disbursements consists of expenditures by the War and Navy Departments, which rose, in this three-year period, from $58 million in •1944, to $82 million in 1946. Although the data received were not sufficiently detailed to permit a complete analysis, it is likely that mustering out pay contributed substantially to the increase in 1946. The amounts, it should be noted, represent only actual disbursements in the Island, including the net pay of continental servicemen stationed here, but excluding pay drawn by Puerto Rican members of the armed forces stationed abroad. A substantial proportion of the total, especially in the earlier war years, must have been for construction of military bases, and hence essentially of a nonrecurring character. • There is no doubt, however, that military expenditures will remain relatively high in the postwar period, although below 1942-46 levels, and will constitute a significant source of income to the Puerto Rican economy. Thirdly, a sharp rise was registered in 1946 in payments to ex-servicemen by the United States Veterans Administration. The bulk of the payments, however, constituted unemployment benefits, the $20 a week for a maximum of 52 weeks to which unemployed dischargees were entitled. Presumably, most of these benefits had been exhausted by the end of the 1946 fiscal year, and the 1947 data will give a truer picture of the longerrun trend of Veterans Administration expenditures. It is esti34

mated that 60,000 Puerto Ricans served in the armed forces in World War II and, although large numbers have probably since emigrated to the States, insular residents will probably be the recipients of large disbursements by the Veterans Administration for some years to come. Federal Collections

The principal collections of the Federal Government comprise postal revenues, customs collections, and sugar processing taxes, all of which are in effect returned to the Island. The postal revenues are substantially offset by expenditures of the postal service in the Island, customs revenues are either spent in the Island or turned over to the Insular Government, and the sugar processing tax was levied, part, to cover the payments to growers under the Sugar Act of 1937. Unlike in the states of continental United States, therefore, the activities of the Federal Government in the Island result in a one-way flow of funds; expenditures are relatively large, but collections are small, since 'the Island is outside of the United States internal revenue system. Income on Investments The excess of income paid by Puerto Rico to outside owners of Puerto Rican securities and other investments in the Island over the amount received by Puertó Ricans on their external investments ranged between about $4 and $9 million during the war period. This is a relatively small figure in terms of the insular net income, and indicates that no substantial part of the Island's output is being drained off in the form of payments to absentee owners of capital. While precise figures are not readily available, the ratio of net income paid to nonresidents to total income is probably well below that of most of\the independent countries. of Latin America. Moreover, as has been previously pointed out, the bulk of these outpayments is made on stocks of Mainland sugar companies and other direct investments, the income of which fluctuates with the business cycle. In time of depression, therefore, there are no large fixed interest charges to take an increasingly large percentage of a declining total income. Such fixed interest securities as are still outstanding bear relatively low interest rates. 35

Payments to Outside Investors The 'various types of income payments made on outside investments in Puerto Rico are shown in table 10.a Dividends paid by the four so-called mainland sugar companies, shown in detail in table 11, form a significant but by no means dominating part of the total, dropping in 1946 to less than 12 percent of gross outpayments. Moreover, the amounts paid out in 1944 and 1945 were considerably in excess of earnings for those years, as several of the companies involved paid dividends out of previously accumulated surplus. A further reduction in outpayments by this group of companies can probably be anticipated after the completion of the present insular program for breaking up large land holdings. Russell and Company, Luce and Company, and the Fajardo Sugar Growers Association are landholding affiliates of South Porto Rico, Central Aguirre, and Fajardo Sugar Co., respectively. TABLE 1Ó Income on Externally-held Investments in Puerto Rico, 1942-46 (In thousands of dollars) Kind of Investment

1942

1943

1944

1945

1946

Mainland sugar companies Other directinvestments Insular Government bonds Water Resources Authority bonds. Municipal bonds Federal agency loans Miscellaneous investments

4,544 1,587 1,040

2,105 4,350 961

2,406 6,223 458

3,414 5,850 282

1,041 5,102, 215

702 700 388

650 755 302

793 504 993 80

633 438 1,020 104

8,961

9,123

11,916

8,553

11,960

Total

488 589 ' 890 956

The largest item appearing in table 10 is the income on direct investments other than sugar. These constitute the dividends paid by Puerto Rican subsidiaries of outside corporations, and the net earnings of the Puerto Rican branches of outside concerns. s The 1943 figure of $6,073,000 given in the previous study (erroneously shown as $6,500,000 in Table 1 of that study) has been 'revised upward to $9,123,000 on the basis of data not available at the time the figures for that year were estimated. 36

TABLE 11 Income of Mainland Sugar Companies Operating in Puerto Rico,_ 1944-46 _ Company

Recipient of Dividends

1944 Dividends

1945

1946

Earnings Dividends

Earnings

Dividends

Earnings

Russell & Co., Sucrs. . Stockholders of South Porto Rico $86,287 $671,161 Sugar Co. (N. J.) South Porto Rico South Porto Rico Sugar Com594,663 1,340,000 $500,000 pany (N. J.) Sugar Co. (P. R.) Fajardo Sugar Co. of Stockholders 324,640 —111,201 324,100 P. R.» Fajardo Sugar Grow- Stockholders of Fajardo Sugar 326,160 -257,122 326,160 ers Assn. Co. of P. R. Cen. Aguirre Sugar Central Aguirre Associates 399,968 520,466 273,786 Co. (P. R.)b Central Machete Co. Central Aguirre Associates. , . . . . 118,226 130,500 130,500 (P. R.) (d) Ponce & Guayama Central Aguirre Associates (d) 79,376 R. R. Co. (P. R.)o Stockholders and Company. . of Luce Central Aguirre 1,118,400 274,797 1,119,600 Associates. Eastern Sugar Associ- Stockholders 268,840 -495,824 134,420 ates.

$214,094

$372,867

$95,208

899,720

374,000

485,788

370,657

242,917

179,855

-64,319

326,160 —227,289

796,963

433,044

127,606

101,500

74,741

94,548

68,068

305,250

189,448

.13,641

$44,221

Total Less: Income tax withheld on dividends paid

3,068,508 662,911

730,292 4,399,103 2,7,58,160 1,417,444 1,643,084 662,911 985,313 985,313 376,182 376,182

Net income to stockholders

2,405,597

67,381 3,413,790 1,772,847 1,041,262 1,266,902

A Consolidated basis; inclu)le's subsidiaries. b Consolidated basis; inc,ludes income received from Ponce and Guayama R. R. Co. a Represents direct interest óf Central Aguirre Associates only. d Included in data for Central Aguirre Sugar Company. Sources: Moody's,Iñdustrials; reports of companies to the Securities and Exchange Commission; withholding tax returns. filed with the Insular,Treasury. Note: Fajardo, Central Aguirre and Eastern figures are on the basis of fiscal years ended July 31; South Porto Rico, September 30. For 1942-43 data see the previous study cited herein.

TABLE 12.-Income on Externally-held Direct Investments in Puerto Rico, Other Than Sugar, 1944-46 (In thousands of dollars) 1946 1944 1945 Industry Manufacturing Public utilities Agriculture (other than sugar) Banking Other, chiefly distribution Total.

2,469 305 350 811 2,288

2,192 339 294 1,098 1,927

1,760 340 201 1,093 1,708

6,223

5,850

5,102

As will be seen by reference to table 12, manufacturing and distribution accounted for most of this total, with banking ranking third in importance. Most of the banking profits, however were not, in the final analysis, earned in Puerto Rico, consisting as they did in major part of United States Government bond interest. Among the manufacturing enterprises, distilleries constituted the most important group and were closely followed by the production of needlework and of carbonated beverages. Outside capital also participated. in the manufacture of fertilizers, tobacco products, and in the polishing and setting of precious stones. An important portion of the profits under distribution was accounted for by the four petroleum companies, which in 1946 received 34 per cent of the total profits in this group. Public utilities included the docks, as well as a telephone, an express, and & radio company. Other items áre relatively insignificant. Interest on the Insular and municipal debt amounted to only $653,000 in 1946, and has since been reduced to an even lower figure by the bond repurchase and redemption program of the Insular Treasury. With the marketing of a $20-million bond issue on the Mainland in January, 1944, the Water Resources Authority also became a significant debtor to the outside world. The large entry under "miscellaneous" in 1944 also includes the interest of $888,000 paid to the previous owners in connection with the purchase of the Puerto Rico Railway,. Light and Power Company. Interest on United States Government agency loans has shown a tendency to increase in recent years, due to larger extensions of credit by the farm credit agencies (see table 13) . Receipts from Abroad The only substantial form of income received on investments by Puerto Ricans outside the Island, so far as is known; is inter38

TABLE 13 Interest Paid to Federal Government Agencies, 1942-46 (In thousands of dollars) Agency Farm Security Administration Federal Land Bank of Baltimore Federal Farm Mortgage Corporation Federal Intermediate Credit Bank of Baltimore Baltimore Bank for Cooperatives Home Owners Loan Corporation Reconstruction Finance Corporation Puerto Rico Hurricane Relief Loan Section Puerto Rico Reconstruction Administration Total.

Presumably included in Federal Land Bank. b Not entered.

1942

1943

1944

1945

1946

$48,702 436,250 (b) 64,605 2,515 54,278 93,704 98 (b)

$47,714 425,492 (~) 82,093 2,567 52,803 164,756 (b)

$150,519 389,215 69,708 59,417 6,941 39,081 28,905 103 146,502

$116,085 368,264 73,361 79,938 14,314 81,996 1.01,013 730 207,129

$178,993 406,512 116,566 106,477 34,880 25,041 42,532 142 108,948

700,152

775,425

890,391

992,830

1,020,091

est on United States government bonds, holdings of which have increased tremendously during the war. Even of this, the major amount was received by the banks (see table 14), although over TABI.E 14 Income on Puerto Rican Investments Abroad, 1942-46 (In thousands of dollars) Type of Income Interest on U. S. Government bonds: Held by banks Held by Insular agencies Held by others Interest on postal savings deposits Other interest Dividends on stock of Mainland sugar companies Other dividends Total

1942

1943

1944

1945

1946

122 (a) (a)

419 (e) (a)

1,820 38 145

2,213 355 229

2,406 1,181 263

37 (b)

31 (b)

43 1

67 2

123 49

365 b 50

533 b 80

339 122

271 150

236 200

574

1.063

2,508

3,287

4,458

Believed to be negligible. b Other interest and dividends combined in 1942 and 1943.

a million dollars was received by Insular Government agencies in 1946. As in the previous study, dividends received on stock of the four Mainland sugar companies have been shown as a receipt from abroad in these tables. The net amount of profits leaving the Island as a result of the operations of these companies can be considered to be the difference between the payments and receipts items; however, it should be noted the Puerto Rican shareholders of South Porto Rico and Central Aguirre receive dividends on stock of parent companies who have no direct operations in Puerto Rico and who, in fact, have income from sources other than Puerto Rico. Miscellaneous Services Other current account items for which it was possible to make estimates are shown in some detail in table 15. These resulted in large net payments over the five-year period, with net payments for insurance being the largest single item. All the insurance companies operating in the Island, save one, are external companies—American, British, or Canadian. Their net "profits"—premiums less losses, commissions, and other ~ Puerto Rican expenses—have been entered in this accotrñCIt is also, possible to treat these payments as income on investments, . 40

TABLE 15 Miscellaneous Services, 1942-46 (In thousands of dollars) Services

1942

1943

1944

1945

530

595

774

1946

Receipts: Salaries, commissions, etc.. . . Advertising, radio programs, etc. Other

200 256

200 93

377 86

392 86

506 85

Total receipts

456

293

993

1,073

1,365

3,437 300

2,000 450

865

887

3,365 530 - 344 285 223

3,689 474 171 246 233

4,033 479 252 184 394

4,602

3,337

4,747

4,813

5,342

Payments: Insurance Motion picture rentals Salaries, commissions, etc Home office expenses Other Total payments

but the companies concerned in general have few assets in the Island other than the statutory deposit of $25,000 and it seemed more realistic therefore to treat the item as a payment for a service. Motion picture rentals were the second most important debit item in this group, while commissions and advertising revenues made up the bulk of the credit side. Long-term Capital Movements Throughout the war period the large excess of receipts on current account enabled Puerto Rico to reduce its net indebtedness to the outside world; in part this was accomplished by the repayment of external debt, but mainly the change was due to the building up of Puerto Rican assets in the Mainland. It is true, of course, that in a sense this building up of external assets was merely fortuitous—an inevitable outcome of the fact that Puerto Rico is part of the monetary area of the United States. As in most areas of the world, the supply of liquid funds —currency and bank deposits—in the hands of the public expanded greatly during the war. This expansion in the means of payment in Puerto Rico arose almost solely from external factors—exports and Federal expenditures in the Island—and hence resulted in a substantially equivalent increase in external assets. These assets consist primarily of United States currency, United States Government bonds, and external assets of the Puerto,Ricanr banking system. 41

These changes in the debtor-creditor position may, for purposes of analysis, be grouped into two categories: (1) capital movements proper, which are more or less autonomous in nature; and (2) "balancing items," which may be considered to be the more or less passive result of all the other balance-of-payments transactions. The first group is discussed in this and the following section; the balancing items, which correspond to the movements of gold and official exchange reserves in a truly international balance of payments, are discussed in a third section, followed by an examination of the "errors and omissions" or residual item. Federal Loans Large In general the term "long-term capital" is taken to mean investments with an original maturity of one year or more, or of indefinite maturity, e.g., common stocks. However, rather than separate Federal Government loans, they have all, been included in the long-term accounts. A detailed breakdown by agencies is shown in table 16, and it will be seen that almost all the loans were made in connection. with agricultural activities. Particularly important are thé crop financing activities of the Production Credit Association of Puerto Rico through the Federal Intermediate Credit Bank, as well as the debt-refinancing and land-purchase mortgages of the Federal Land Bank. In Puerto Rico, as on the Mainland, these latter activities- are designed to encourage farm ownership by providing credit at reasonable rates. In all years but 1946, disbursements exceeded repayments, i.e., outstanding loans increased. Insular Debt Reduced The debt reduction program of the Insular Government, which had led to total retirement of insular and municipal 'bonds of over $8 million in 1943, proceeded at a slower pace in the three subsequent years—chiefly because of the absencé of any further outstanding issues which could be, called prior to maturity. Moreover, in 1944 and 1945, redemptions were more than offset by new bond issues, not of the Insular Government proper, but of the Water Resources Authority ($20 million in 1944 and $5 million in 1945) and the Land Authority ($2 million in 1945). Part of these issues were taken in the Island, however, chiefly by the banks. Furthermore, over $10 million (see table 17) was spent 42 t

TABLE 16 Lending Activities of Federal Agencies, 1942-46 (In thousands of dollars) 1942 Agency

Baltimore Bank for Cóoperatives Federal Intermediate Credit Bank of Baltimore Federal Land Bank of Baltimore Federal Farm Mortgage Corporation Farm Credit Administration— Emergency Crop and Feed Loans Farm Security Administration Federal Public Housing Authority Home Owners Loan Corporation Recónstruction Finance Corporation Puerto Rico Hurricane Relief Loan Section Puerto Rico Reconstruction Administration Total

1943

1944

1945

1946

Loans

Repayments

Loans

Repayments

Loans

Repayments

Loans

Repayments

Loans

Repayments

118

812

357

1,687

981

3,701

3,538

9,070 857

7,100 663

7,586 638

9,257 572

8,251 831

7,509 1,316

8,443 1,126

6,502 1,201

11,540 942

12,635 1,345

(°)

(°)'

477

273

884

279

346

434

1,410 1,537

1,068 299

1,485 1,107

1,133 395

1,343 1,682

1,437 802

1,397 1,077

1,213 768

1,686 1,497

1,430 1,320

677 147 1,147

429

171 2,136

171

1,130

126

315

138 56

875

149 286

220

122

136

111

168

162

273

1,006

(°)

14,710

9,916

13,012

12,898

Data not available. Repayments include both principal and interest.

202

13,522

12,509

14,670

12,341

19,998

22,245

by the Water Resources Authority in 1944 to acquire the assets of the Puerto Rico Railway, Light and Power Company. In effect, one type of outside investment in Puerto Rico was 'substituted for another. Direct Investments The net movement of outside capital invested in Puerto Rican industry was relatively small during the war years.10 A small net outward movement was recorded until 1945, with a net inflow of about $2.5 million in 1945 and 1946. Although some new investments, in the Island occurred during the peroid, particularly in the 'form of new rum distilleries, the net amount of capital involved was small. Puerto Rican Investments Increased Puerto Rican holdings of United States Government bonds and postal savings deposits—the only outside investments of Puerto Ricans for which data were obtained—increased sharply during the war. This was especially true in 1945, when the investment of excess balances of the Insular Treasury and other Insular agencies in United States bonds contributed largely to a net outflow of funds from Puerto Rico of $73.4 million. The net figure fell to only $10.8 million in 1946, about equal to the 1943 level. Short-term Capital Movements The movement of foreign short-term capital in Puerto Rico is ordinarily dominated by the changes in Federal Government deposits in insular banks. These increased sharply in 1944 and 1945, apparently partly, at least, as a result of a U. S. Treasury policy of leaving the proceeds of bond sales in the banks where first deposited. During these years, for the first time, Federal deposits in native banks reached signficant proportions, as usually most Federal funds are deposited with the National City Bank of New York, the regular active Federal depositary in the Island. Reductions in temporary loan notes of insular public housing authorities held by continental banks, and fluctuations of noninsular deposits other than those of the United States Government accounted for the rest of the net movement in this group • 7 ° As indicated in Chapter IV, the data available for this item are relatively incomplete.

TABLE 17 Capital Transactions in the Balance of External Payments, 1942-46 (In thousands of dollars) (Plus sign indicates inflow of funds to Puerto Rico; minus sign outflow from Puerto Rico)

I. Long-term capital transactions: A. Increases (+) in outside investments in Puerto Rico: 1. New Federal agency loans 2. New bond issues—Insular Government and WRA 3. Direct investments, net Total ,a

B. Decreases (—) in outside investments in Puerto Rico: 1. Repayments of Federal agency loans 2. Retirement of municipal bonds 3. Retirement of Insular bonds 4. Retirement of Water Resources Authority bonds 5. Direct investments, net 6. Net repurchases of outstanding P. R. securities 7: Purchase of P. R. Railway Light and Power Company Total Net increase (+) or decrease (—) C. Decreases (+) in Puerto Rican investments abroad: 1. U. S. Government bonds sold by Insular agencies 2. Redemptions, series E bonds Total

}

1942

1943

1944

1945

1946

14,710

13,012

13,522 20,000

14,670 7,000 842

19,998 1,649

14,710

13,012

33,522

22,512

21,647

9,916 4,265

12,898 8,283

300

500

12,509 1,985 2,127 2,164 46 6,019 10,550

12,341 638 1,020 287

22,245 1,468 2,532 460

281

2,687

Transactions

14,481

21,681

35,400

14,567

29,392

+229

-8,669

-1,878

+7,945

-7,745

5,051

22,342 8,496

5,051

30,838

TABLE"17 (Continued) Capital Tránsactions in the Balance of External Payments, 1942-46 (In thousands of dollars) (Plus sign indicates inflow of funds to Puerto Rico; minus sign outflow from Puerto Rico)

I. Long-term capital transactions—Continued: D. Increases (—) in Puerto Rican investments abroad: 1. U. S. Government bonds purchased by Insular Agencies 2. Other purchases of U. S. Government bonds 3. Net increase in postal savings deposits Total Net decrease (+) or increase (—) II. Short-term capital transactions: A. Net increase (+) or decrease (—) in outside claims on Puerto Rico• 1. U. S. Government deposits in insular banks 2. Other outside deposits in insular banks 3. Temporary loan notes of public housing authorities 4. Drafts on Puerto Rican importers held for collection Net increase (+) or decrease (—) B. Net decrease (+) or increase (—) in Puerto Rican claims abroad: 1. Insular Government and WRA balances on the Mainland

1942

1943

1944

1945

1946

2,198 47

8,932 1,996

2,320 12,793 2,490

60,058 16,356 2,058

81,525 8,959 1,188

2,245

10,928

17,603

78,467

41,672

—2,245

—10,928

—17,603

—73,416

—10,834

+2,606 +381 +2,364 —6,090

+451 +831 +558 —2,877

+6,576 +174 —256

+15,558 —442 —69

-7,002 +2,330 —4,011

—739

—1,037

+6,494

+15,047

—8,683

—1,620

—5,308

+1,711

of items. The large repayment of housing authority notes in 1946 simply represented a temporary shift from continental to insular banks. The only short-term. Puerto Rican assets in the Mainland for which data were obtained consisted of certain balances of the Insular Treasury (deposited in advance for bond redemption purposes) and a part of the. proceeds of the bond issues floated by the Water Resources Authority. Both of these are temporary phenomena; the combined total of the two accounts was reduced by $1.7 million in 1946. The Balancing Items As already indicated, for purposes of analysis it is convenient to segregate certain capital movements in the Puerto Rican balance of payments and to label them "balancing." These are not the only transactions in the accounts, of course, that are not completely autonomous in nature; as a matter of fact, causal relationships can be traced between almost any two groups of transactions. But certain banking transactions are almost completely passive in nature, and so may be taken to represent the net result of all the other receipts and payments that occur. In this study, three types of transactions are considered as balancing: 1. The inflow or outflow of United States currency through the banking system 2. Changes in all outside assets of insular banks, including their holdings of United States Government securities 3. Changes in home office accounts of Puerto Rican branches of mainland and Canadian banks, whether these are an asset or liability on the branch account books These items are listed in table 1, with changes in home office accounts netted into the changes in external assets of the banks.11 As with the other capital movements, these transactions resulted in a net increase in Puerto Rican external assets in each of the five years under study. Simply stated, the excess funds received by Puerto Ricans, as a result of their net sales of goods and services abroad, were partly deliberately invested in outside securities or used to pay debt; the remainder was accepted in the 11 The amounts involved were outflows (—) of $13,976,000 in 1942, $4,893,000 in 1943, $1,830,000 in 1944, and $222,000 in 1945, and an inflow of $741,000 in 1946.

form of actual United• States currency, or in the form of bank deposit credits in New York. The latter, in turn, were partly invested in United States Government bonds by the banks. Errors and Omissions As explained in chapter IÍ, if all transactions were correctly estimated and entered in the balance of payments statement, the two sides of the account would be in balance. As shown by table 1, the actual figures fail to balance by a few million dollars in each year. The relatively small size of the residual error, however, should not be taken as evidence that each of the other figures in the statement is nearly correct. There could easily be, and probably are, offsetting errors of a combined magnitude larger than the net error. It is difficult to name any particular account as the one most likely to contain the error. No data were available, for instance, regarding new Puerto Rican investments outside the Island, except in postal savings and Federal Government bonds. To the extent these occurred, of course, the residual item would be larger than it actually is. Similarly, no data were available regarding personal remittances except through post office money orders; the net movement of the omitted remittances, if inward, would serve to reduce the residual. The travel figures are only crude estimates based on opinion and not on statistical investigation. The estimates could easily be wrong a million dollars or so in either direction. Again, it is commonly supposed that commissions are paid on a substantial portion of the Island's imports. Only a small entry for commissions received has been made, chiefly on the basis of data obtained from income tax returns; any underestimation of this item, if corrected, would also serve to reduce the unexplained balance. On the other hand, one item that might at first be considered to affect the balance probably does not, at least to any signficant extent. No estimate has been made for currency carried in and out of the Island or sent in the mails. To the extent that such currency movements offset, or finance, transactions included in the statement—such as travel—an error is introduced. However, many of these movements probably offset transactions for which, 48

~ ~

in effect, no estimate has been made, and hence both sides of the accounts are understated, and the residual unaffected. As more experience in estimating is gained, and as the work is placed on a continuing basis, it should be possible to obtain more accurate data and thus reduce the amount of error. However, the figures presented herein are sufficiently accurate to show clearly the essential facts of Puerto Rico's external transactions, and it is hoped that the data will be of some value in the analysis and solution of some of the Island's pressing economic problems.

CHAPTER IV METHODOLOGY AND SOURCES OF DATA Merchandise Trade The Bureau of. the Census of the United States Department of Commerce compiles export, import, and shipping statistics of the domestic and foreign trade of the United States. Puerto Rico is classified as a customs district of the United States. The following publications of the Bureau of the Census of the Department of Commerce were used as basic data for the merchandise trade of Puerto Rico: FT-800—United States Trade in Merchandise and Gold amd Silver with United States Territories and Possessions. Issued in two sections, A and B, it lists for individual territories and possessions detailed information on the amount (value and weight) of individual commodities shipped to and from continental United States. FT-970—Foreign. Trade by United States Customs Districts and Areas (no commodity or country data.) The Bureau of the Census does not have a publication showing U. S. foreign trade through the customs district of Puerto Rico with commodity or country data. The Insular Department of Agriculture and Commerce, which receives the pertinent data in code form from the Búreau of the Census, publishes this information in its annual report. Customs regulations require that exports be declared at their value at the port of exportation, preferably at actual selling price. Nevertheless, sometimes declared export values are not correctly recorded. Common errors are: either failure to deduct ocean freight and insurance, or not to include charges which should be included to arrive at the f.o.b. port of shipment value, such as inland freight, packing, and dock expenses. Differences between invoice and entry values are common for imports included on the free list or those subject to specific duties. In the case of importers purchasing through a foreign office or branch, two factors which, may produce considerable difference between the recorded import values and the actual dollar payment are: (a) purchases through widely separated 50

buying. agents, particularly in small quantities to be assembled for shipment; and (b) purchases abroad by importers who invoice themselves. As it is very difficult to detect these errors in recorded trade, some necessary adjustments have been almost impossible. However, several substantial adjustments have been made in the recorded merchandise trade figures for the purpose of this study. Exports Two adjustments were made to the recorded exports as follows: 1. Sugar figures. Tonnage and value figures for sugar exports were obtained from the Bureau of the Census and from the Sugar Branch, U. S. Department of Agriculture. The figures differed in both tonnage and value. As the Sugar Branch recórds the transactions at a date closer to the date of sale we decided to use their tonnage figures. The adjustment made follows: The Department of Agriculture tonnage figures were multiplied by the effective f.a.s. Puerto Rican O. P. A. ceiling prices on sugar during the specific periods under study as reported in the records of the Sugar Branch, U. S. Department of Agriculture. Census figures were increased or decreased by the net difference. 2. Unrecorded items which were shipped through the Post Office were added to the recorded exports. Based on a sample of the money orders issued outside of Puerto Rico and paid in local. post offices, it was estimated that 10 per cent were drawn by business firms in favor of Puerto Rican exporters. This amount was considered the value of unrecorded merchandise exports. made through parcel post. Totals of money orders issued and money orders paid in Puerto Rico, were obtained from the Annual Report of the Postmaster 0 General. Based on a sample 12 of money order applications and cancelled money orders filed at the San Juan -and Santurce post offices, we arrived at percentages to estimate: 1. The amount of money orders issued in Puerto Rico and cashed in non-insular post offices 2. The amount of money orders issued outside of Puerto Rico and cashed in insular post offices 12 Beginñing with July 1943 complete monthly records were studied for every other two months.

3. The amount of money orders which were made for payment of merchandise 4. The amount of money orders which represented personal r'emittances Lack of time and personnel prevented more complete research. In future studies the sample should cover post offices located all over the Island. Imports Additions to recorded imports include the following: 1. Department of Agriculture shipments to Puerto Rico, both for sale and for free distribution 2. Surplus property sold by the War Assets Administration. 3. Imports by parcel post The necessary data for the merchandise brought into Puerto Rico by Federal agencies were obtained from the agencies concerned, in part through the Department of Commerce, Washington, D. C. War Assets Administration figures represent field transfers, at cost to the Puerto Rican purchasers. The f.o.b. mainland value of Department of Agriculture imports was estimated by deducting from gross sales Puerto Rican handling costs, ocean freight and marine insurance. Exact gross sales and Puerto Rican handling costs were reported to us by the federal agency. Ocean freight and marine insurance expenses were estimated by the procedure used in calculating the total freight and insurance bill paid by Puerto Rico on regular imports. Imports through parcel post channels include an estimate of 25 per cent of total money orders issued in Puerto Rico and paid in non-insular post offices. The study of money orders issued ° in Puerto Rico and cashed outside showed that around 25 per cent were written in favor of business firms, especially United States mail order houses. The amount of C. O. D. shipments received in the Island was xeported by the San Juan post office. It was also discovered that shipments of cigarettes from the Mainland to Puerto Rico were overvalued in the official statistics, apparently due to the inclusion iii some instances of the Federal excise tax, which is not, of course, payable on cigarettes exported to Puerto Rico. A corrected average value was determined by reference to the statistics of exports from the United States to 52

foreign countries; the amount of the adjustment is shown in table 2. Ocean Transportation Transportation payments and receipts cover such items as ocean freight, marine insurance, passenger fares and shore expenditures. Ocean Freight

Receipts arise from exports transported in insular carriers and payments from imports transported in non-insular carriers. Imports in Puerto Rican carriers or exports in foreign carriers do not give rise to balance of payments transactions. Since there are so few ships owned by Puerto Rican residents and there is no public record of their activities, it was impossible to estimate ocean freight receipts. In calculating the payments it was assumed that all Puerto Rican imports come on non-insular vessels. Detailed data consisting of origin and tonnage of commodities were obtained from the Bureau of the Census. Freight rates for specific commodities imported from United States were supplied by the United States Maritime Commission, and tanker tonnage and rates by War Shipping Administration. Freight rates on imports from foreign countries were obtained from leading shipping companies' representatives in the Island. During the period under study, a high percentage of the imports from foreign countries came in transit through United States. This fact was considered in calculating the cost of freight on :goods imported, especially from Argentina, Uruguay and other South American countries. For lack of data no estimates were made for air transportation. During the period under study a considerable amount of perishables and even durable goods were imported by air with relatively high transportation costs. In future studies an adjustment should be made for this method of transportation. The Bureau of the Census compiles data on trade by air but does not publish it in commodity or country detail by districts. The information must be available in code form and might be made available to any interested agency, such as the Insular Department of Commerce, upon request. 53

Marine Insurance It was assumed that all marine insurance on exports was written in the Island. As ultimately this expense is paid by the purchaser of the merchandise, for balance of payments purposes it constitutes a receipt. Total premiums received for marine risk for two calendar years, as reported in the annual reports of the Superintendent of Insurance, were averaged to arrive at total premiums received by fiscal year. On the other hand, insurance on imports, which constitutes the payments side, was assumed to have been placed abroad. Leading insurance representatives in San Juan furnished us with the rates and the number of days each rate was in• effect. A weighted average rate was calculated and total insurance paid was computed as a percentage of the value of imports. Passenger Fares Passenger fare receipts consist of fares paid to Puerto Rican carriers by non-residents. Payments cover fares paid to noninsular carriers by Puerto Rican residents. The source of infórmation for number and residence of travelers, as well as their method of travel, was the U. S. Immigration and Naturalization Service. The most important problem met was that of ascertaining the residence of the traveler, especially when dealing. with United States citizens. It was arbitrarily decided to consider citizens with Spanish names as insular residents and those with English names as non-insular. Also the place of birth, when given, was used as a clue in determining residence. Yearly totals for resident and non-resident arrivals and departures by method of travel (air or water), destination (Mainland, Virgin Islands, foreign), and flag of carrier (local or foreign) were thus obtained. Average fares were furnished by steamship and airplane companies. Also arbitrarily it was decided that the lowest figures between f arrivals and departures represented the number of traveling residents; the difference was considered as emigration or immigration. The number of Puerto Rican residents traveling in noninsular carriers was multiplied by the appropriate round=trip fare and the number of emigrants was multiplied by the corresponding one-way fare, to calculate the passenger fare payments. The receipt side of this account covers the non-insular resi- • 54

dents traveling in local carriers between Virgin Islands and Puerto Rico. Information on travel to other ports in Puerto Rican carriers was not available. Port Expenditures Information on ocean port expenditures was obtained directly from steamship companies or their local agents. They reported expenses incurred in insular ports for the following purposes: 1. Port charges, such as tonnage tax, customs fees, signal service, U. S. quarantine inspection, pilotage, handling lines, mooring, immigration inspection, harbor dues, and bond fee 2. Cargo expenses as stevedoring pay roll, wharfage, watchmen, clerk's wages, lighterage and custom inspectors 3. Other charges as consular fees, water, food supplies, bunker fuel purchases, cables and telegrams, repairs, agency fees and sundries Data on airport expenditures were based on income tax returns and reports made by the airplane companies to the Insular Treasurer. Receipts include expenditures made in the Island by noninsular .carriers and payments are expenditures incurred by local carriers in non-insular ports. Receipt figures include an almost complete coverage of both ship and plane companies. Another item included in the receipt side of port expenditures was the disbursements made in the Island by the crews of planes and ships. It was estimated that on the average the crew of a plane stayed in the Island overnight and that their average expenditure was $10. For seamen a breakdown was made into alien and non-resident citizens with estimated average expenditures of $10 and $50 respectively. The information on number óf crew members granted shore leave was obtained from the U. S. Immigration and Naturalization Service. Average expenditures were arrived at after consultation with airplane and ship companies' representatives in the Island. Information on payments is quite incomplete due to the lack of public records regarding locally owned carriers. Travel Expenditures There is no source of information upon which reliable estimates of travel expenditures for the period under study might 55

be based. In the absence of a direct source, information supplied by the Puerto Rico Chamber of Commerce, local banks, businessmen, foreign consuls, customs and immigration officials and government agencies was accepted as a basis for estimating the number as well as the average expenditures of travelers. The expenditures of Puerto Rican residents traveling abroad constitute the payments side of the account. The total number of travelers comprises, temporary visitors for business, study, pleasure, health treatments and even short period working tryouts. Estimates were made for number and average expenditures in each category. On the receipts side no segregation by purpose of trips of visitors in Puerto Rico was attempted. Estimates for travel expenditures in Puerto Rico are almost arbitrary. It is essential that more reliable estimates be made for travel expenditures. in the future. A system of questionnaires and personal interviews from which averages could be computed, per diem, and per capita, for food, lodging, entertainment, and miscellaneous expenses should be devised and operated. An attempt should be made to secure a change in the passenger manifests filed with the Immigration and Naturalization Service to show more detailed data for citizens traveling between Puerto Rico, the Mainland, the Virgin Islands, and foreign countries. Personal and Institutional Remittances There is not much information available on personal remittances other than by postal money orders. It was impossible to obtain any information on personal remittances through the banks, which are undoubtedly of importance, especially on the outward side. As explained in the methodology section for merchandise trade, personal remittances in both directions were estimated after a study of the domestic money orders issued or cashed at the San Juan and Santurce post offices. ' An arbitrary adjustment was made to the figures obtained from the sample, to allow for the fact that the sample used was not representative of the whole Island. It was estimated that 75 per cent of the domestic money orders issued in Puerto Rico and collected abroad represented personal remittances. Similarly 90 per cent of the total domestic money orders issued abroad and cashed in Puerto Rico was con56

sidered as personal remittance receipts. All international money orders cashed and issued in the territory of Puerto Rico, as reported in the annual report of the Postmaster General, were added to the personal remittance account. Information on institutional remittances was obtained directly from the various religious, educational or scientific organizations operating in Puerto Rico: The net amount received from or sent to abroad was reported. Some of the organizations failed to answer our request but we believe all the important ones have been included, and an omission estimate was made to cover nonreporting agencies. In order to have better estimates on both personal and institutional remittances, the cooperation of the local banks should be obtained so that they will keep data on exchange sold, at least on a sample basis. Moreover, it is possible that sizeable remittances may take the form of personal checks, and this. should be investigated. Federal Government Expenditures For the purpose of this study Federal expenditures are classified as: (1) grants-in-aid, which are entrusted largely to Insular agencies for disposal, and (2) direct expenditures of Federal agencies, with offices in the Island. The amount and classification of each disbursement were obtained from each particular agency responsible for the transactions. Major types of expenses reported were: personal services, other office expenses, traveling expenses, pensions, adjustment payments, work relief, etc. Federal agencies which had imported merchandise into Puerto Rico reported their sales, handling charges, and f.o.b. cost if available. Federal lending agencies reported disbursements, repayments, interest collected and administrative expenses as separate items. Data on imports of goods were included on the merchandise trade account and data on Federal loans in the capital movements and income on investment transactions. Information from Federal agencies was obtained through the cooperation of the Clearing Office for Foreign Transactions and of the International Economics Division, both of the United States Department of Commerce, Washington, D. C. Income on Investments The estimates of income on investments include remittances .57

made abroad or received from abroad for: (a) interest on bonds, loans, notes, acceptances, savings accounts, and similar assets;. (b) interest and dividends from subsidiaries; (c) the net income (or loss) of branches; and (d) miscellaneous dividends, rents and other items. These amounts are net of tax withheld at. source. Receipts Interest earned on postal savings deposits was obtained from the annual report of the Board of Trustees .of the Postal Savings System. Information on sales of United States bonds, series E, F, and G, was obtained from the United States Treasury Monthly Bulletin, and data on holdings of other issues from the several Insular departments, agencies or organizations holding them. There is very little information on the other investments held abroad by Puerto Ricans, including marketable government bonds held privately. Some data on miscellaneous dividends and earnings received from mainland companies were obtained from the Insular Income Tax Bureau.. Dividends received by local residents on stock of The mainland sugar companies doing business in Puerto Rico were. calculated by using the percentage of their holdings of the outstanding stock as reported to the Insular Treasurer, or as calculated from withholding tax returns. Payments Income paid on external investments in Puerto Rico includes: (1) interest and dividends paid by Puerto Rican subsidiaries of outside companies; (2) the .net income or loss of Puerto Rican branches of foreign corporations; (3) interest paid on external holdings of bonds issued by the Insular and Municipal governments and corporations; (4) and other miscellaneous interest and dividend payments. Basic information regarding foreign-owned subsidiaries and branches operating in Puerto Rico was obtained from the withholding tax returns and from the regular income tax returns filed with the Insular Income Tax Bureau. In the case of subsidiaries only declared and remitted (credited) dividends were included in the balance of payments. All profit made by a branch is considered a possession of the parent company, and therefore included as a balance-of-payments debit—any portion thereof not actually remitted but retained in the Island as rein58

vested earnings is reflected in the statement as an inflow of foreign capital. Due to the fact that income tax and other sources of information were not readily available for all firms and for all four calendar years involved, it was necessary to use a sampling procedure. The data were most nearly complete for 1945 and 1946. By using the companies for which data were available for both of these years; a ratio of change from 1945 to 1946 was derived. The missing companies in each year were then estimated by assuming they varied in the determined ratio. If there were no data for either 1945 or 1946 for any company, 1943 or 1944 figures were extrapolated in the same manner. Thus complete "benchmark" figures for 1945 and 1946 were obtained. The 1945 figure was then extrapolated to 1944 using as a sample all companies common to both years; and 1943 was chained to 1944. Calendar year data were averaged to produce the fiscal year totals. Although the information on dividends and earnings made by the mainland sugar companies operating in Puerto Rico was available from Puerto Rican income tax returns, comparable information was. obtained from public sources so as to be able to publish the figures for each company. Form 10-K of the Securities and Exchange Commission was the main source used. To ascertain the amount of Insular debt in the hands of outsiders total bonds owned by local banks and the Insular Treasurer were subtracted from the total Insular debt as reported by Insular Department of the Treasury and by the government corporations. Interest payments were allocated proportionally. Information on the interest collected on Federal loans in the Island was obtained directly from the Federal Government lending agencies. Much better estimates of. income payments and receipts could be obtained by introducing some changes in the income tax returns and by the establishment of a questionnaire systém as recommended in the discussion on capital transactions. Miscellaneous Services • Receipts arise from miscellaneous services performed by resi-' dents on behalf of outsiders and payments from services rendered 59

abroad or by non-residents on behalf of Puerto Rican residents. The major types of services covered are: 1. Insurance 2. Motion picture and similar types of royalties and rentals 3. Home office expenses 4. Advertising 5. Communications 6. Foreign ,government representation in the Island 7. Other services compensated by commissions, fees, or salaries The amount entered for insurance represents the excess of premiums written by outside companies over losses and estimated expenses. Data on premiums and losses were obtained from the Superintendent of Insurance; expenses were estimated at 50 per cent of premiums for life and health and 25 per cent for all other types of insurance. It was necessary to average calendar year data to get fiscal year figures. Motion picture royalties or rentals also appear only in the payment side. Income tax returns for the seven larger continental film companies operating in Puerto Rico were the main source of information used. Some allowance was made for the smaller companies. Payments and receipts for all other types of royalties and rentals were obtained from the regular income tax returns and from the income tax withheld at source. Amounts are net of tax withheld at source. Foreign enterprises operating subsidiaries, branches or offices in Puerto Rico allocate part of the parent company's overhead expenses to the insular business. These amounts are usually deducted from the total gross income of the local company in computing net income subject to Puerto Rican tax. As these transfers represent remittances from the Island they have been included in our study. Direct reports were obtained from leading cable, newspaper and radio officials showing the net inward or outward transfers of funds for such items as advertising, news, cable and transcription services, copyright royalties and license fees, agency commissions and others. Information on thé expenses of foreign consulates operated in the Island was scanty. The data available were given by the consuls during personal interviews. 60

Capital Transactions These totals include capital movements involving changes in outside assets in Puerto Rico and changes in Puerto Rican assets abroad. Foreign investments in Puerto Rico exist in the form of: 1. Direct investments—subsidiaries and branches of mainland and other outside companies --~~ 2. External ownership of Insular and municipal governmeñts-and corporation bonds and notes 3. Loans and mortgages made to Puerto Rican residents by Federal agencies operating in Puerto Rico 4. Real estate Puerto Rican investments abroad are in the form of: 1. United States government bond holdings 2. Postal savings deposits 3. Stocks and bonds of Mainland and foreign companies The main sources of information used were: 1. Incomé tax returns filed with the Insular Income Tax Bureau 2. Securities and Exchange Commission, Philadelphia, Pa., form 10K 3. Moody's Manuals and supplements 4. Insular Treasury Department 5. Federal government lending agencies 6. Annual reports of the Board of Trustees of the Postal Savings System 7. United States Treasury Department, monthly bulletin. Outside Investments in Puerto Rico 1. Direct investments Principal information regarding capital transactions of Puerto Rican branches and subsidiaries of outside companies with their home offices was taken from the corporation income tax returns filed with the Insular Government. Although in every case it was not possible to obtain complete information, some figures regarding the following types of transactions were obtained: a. Changes in intercompany accounts between the Puerto Rican corporations and their outside parent companies b. Changes in ownership of securities of Puerto Rican subsidiaries c. Changes in the book value of Puerto Rican branches of out61

side companies. Relatively more complete data were available for this item since the balance sheets of the Puerto Rican branches of necessity had to show the net worth of the branch whereas the intercompany accounts of the subsidiaries were frequently not separable from other accounts receivable and payable. 2. Insular_ancUnunicipal debt Daatäregarding the outstanding amount of Insular and municipal debt, including the debt of public corporations, were obtained chiefly from the Insular Treasurer and the Development Bank. This included the amount outstanding at, the beginning and end of each year, bond redemptions through sinking funds and otherwise, and new issues floated during each fiscal, year. The estimated amount held by non-residents, was determined by deducting from the total outstanding the amounts known to be held by Puerto Rican commercial banks, the Development Bank and the Insular Treasury.. Some small additional amounts may have .been held by private individuals and corporations in the Island but the amount was not, determinable. 3. Loans of Federal agencies Data regarding new loans made by Federal agencies and repayments on outstanding loans were obtained .in each case from the individual agencies concerned. No information was obtained regarding changes in external ownership of Puerto Rican real estate or miscellaneous holdings of securities of Puerto Rican corporations. External Investments of Puerto Ricans 1. Holdings of United States government bonds Data regarding sales of series E, F and G bonds were obtained from the monthly bulletin of the United States Treasury Department. This source also reported, for the fiscal years 1945 and 1946, redemptions of these issues thus making it possible to arrive at estimates of the amount outstanding as well_ as the annual movements of capital involved. Only incomplete data were available regarding purchases and sales of marketable United States Government issues except for transactions. of Insular Government agencies, such as the Treasury.Department, the University, and the Development Bank. A few instances of purchases by Puerto Rican corporations were discovered in 62

examining income tax returns of direct investment companies, but no complete survey was attempted. 2. Postal savings deposits Data regarding the net increase or decrease in postal savings deposits were obtained from the annual reports of the Trustees of the Postal Savings System. 3. Miscellaneous portfolio investments Practically no information was obtainable on changes in investments by Puerto Ricans in stocks and bonds of mainland and foreign companies. Again, a few individual transactions were discovered in examining income tax returns.

Suggestions for Improving Data Certain changes in the present corporation income tax form would materially assist in improving balance-of-payments statistics. In the first place the forms should show surplus reconciliation in order that the total amount of dividends paid during the year can readily be determined and thus by comparison with the withholding tax return it can be discovered whether or not a majority of the stock of the company is held abroad. Secondly, the balance sheet schedule could be amended to require segregation of accounts receivable and payable between insular and noninsular debtors and creditors. The net change in such accounts would measure the flow of capital resulting from commercial credits. This same information could be required from partnerships and sole proprietorships. A further refinement would be to segregate accounts receivable and payable to and from outside parent and associated companies. In the case of Puerto Rican branches of outside concerns the balance sheet should show Puerto Rican assets and liabilities only (except for external assets and liabilities not involving the home office) ; the net assets would then represent the home office equity in the Puerto Rican branch, changes in which would represent capital movements. The law requiring all corporations operating in Puerto Rico to file data regarding their stockholders with the Insular Treasury Department should be more completely enforced. In the absence of the foregoing amendments to the income tax forms, a system of voluntary questionnaires to be answered by Puerto Rican branches and subsidiaries of outside companies 63

would be essential. Such a system would be helpful in any event since the income tax returns are filed only on the calendar year basis. Data regarding certain short-term assets—principally deposits in the United States of the Insular Treasury and the Water Resources Authority—were obtained from the holders of these assets. Balancing Items The composition of the accounts included under this heading has already been stated; the principal sources of data were as follows: 1. Assets and liabilities of banks—the monthly reports to the Insular Treasury Department filed by all banks operating in Puerto Rico 2. Shipments of U. S. coin and currencythe National City Bank of New York, San Juan branch.

a 64

OTHER PUBLICATIONS OF THE SOCIAL SCIENCE RESEARCH CENTER UNIVERSITY OF PUERTO RICO The Net Income of the Puerto Rican Economy Daniel Creamer

$ .50

Gross Product of Puerto Rico-1940-1944 Daniel and Henrietta L. Creamer

$ .50

Vocational Needs of Puerto Rican Migrants Paquita Ruíz

$ .50

Puerto Rican Emigration Clarence Senior

$1.00

The Puerto Rican Migrant in St. Croix Clarence Senior

$ .50

Bibliografía Puertorriqueña 1930-1945 Tomo I Augusto Bird

$, .50

Bibliografía Puertorriqueña 1930-1945 Tomo II Augusto Bird

$1.00

Estudio de la Comunidad Caroline F. Ware

.. . . . $1.00

Price: Fifty Cents