Proceedings of the Economic Seminar Planning of Puerto Rico (1958) by La Colección Puertorriqueña

PROCEEDINGS OF THE ECONOMIC PLANNING SEMINAR

OF THE COMMONWEALTH OF PUERTO RICO

1958

UNDER THE AUSPICES OF THE INTERNATIONAL COOPERATION ADMINISTRATION (ICA) AND THE . DEPARTMENT OF STATE OF PUERTO RICO

REGIONAL

TECHNICAL

AIDS

CENTER

INTERNATIONAL COOPERATION ADMINISTRATION (ICA) MEXICO 19 6 0

First Edition in English 19 6 0

Printed in Mexico Imprenta Benjamin Franklin, S. A. de C. V. Juan de la Barrera, 65 México 11, D. F.

PREFACE This printing of the Proceedings of the Economic Planning Seminar was made by the Regional Technical Aids Center (RTAC), an agency of the U. S. International Cooperation Administration (ICA), set up specifically as a center for translating and publish ing technical and training materials in Spanish. The printing and publishing were accomplished under a grant of funds made to the Regional Technical Aids Center especially for this project. An Spanish-language edition has been simultaneously prepared by the Regional Technical Aids Center. Any requests for additional copies of this publication, or for any other publications of the Regional Technical Aids Center (RTAC), should be. addressed to the International Cooperation Administration (ICA). care of the Embassy of the United States of America in the respective country. Requests by mail can be addressed to:

International Cooperation Administration (ICA) c/o American Embassy (Capital city and country)

CONTENTS

OF VOLUME

I Page

Agenda

........................................................................................

Inaugural Session — Dr. Arturo Morales Carrion ...

Economic Planning Functions from the Point of View of the

Chief Executive — The Honorable Luts MUÑOZ Marin .

Theoretical Contributions to Economic Development Analysis

and Planning —- Dr. Luz M. Torruellas ....

The Utility of Economic and Social Projections in Economic. Social and Physical Planning —■ Dr. Alvin Mayne . .

Economic Development Projections for Puerto Rico — Dr. Miguel Echenique............................................................... 57 Population Calculation Methods for use in Planning — J. L.

Janer and Mrs. Ada G. de Colón................................ 83 Demand for Human Resources in Puerto Rico — Dr. Miguel Echenique........................................................................... 141

Supply of Human Resources in Puerto Rico — Everett W. Reimer..................................................................................155

Methods of Obtaining Economic Statistics on the Population — Carlos Vila........................................................................... 169

Agriculture in a Developing Economy — The Honorable Luis Rivera Santos .....................................................................

181

Economic Planning Problems and Techniques in Connection with the Development of Puerto Rican Agriculture Pro grams and Projects — Guillermo Irizarry ....

195

Industrial Development in Puerto Rico — Teodoro Moscoso

215

CONTENTS OF VOLUME II Page

Industrial Development Planning in Puerto Rico — Hubert C. Barton..................................................................................239

Localization Problems —- Essential Requisites for the Localiza tion of Industries and Industrial Complexes — Rubén Sánchez................................................................................. 265 Public Service Industries — Sol Luts Descartes and Victor M. Cataldo........................................................................... 285 The Water Supply and Sewage System Authority — Rafael V. Urrutia........................................................................... 299

Planning of Internal Transportation — The Hon. Roberto Sánchez Vilella............................................................... 312 Maritime Port Development Plan — an Outline of Freight Movements in Puerto Rico — Dr. Miguel Echenique .

339

Education in Puerto Rico as Related to its Economic Develop ment — Beresfold Hayward............................................ 355

Public Revenues: Ways to Forecast and Increase Them — The Hon. José R. Nogueda.........................................................367

VII

CONTENTS OF VOLUME III Page Foreign Investments in Puerto Rico — Roberto Montalvo

389

Urban Planning as Related to Economic Planning ■— Filiberto García......................... ........................................................ 405 Regional Planning in Puerto Rico — Rafael Ignacio .

415

Operating Expenditure Budget of the Government of the Commonwealth of Puerto Rico — Manuel Salvatierra

429

Rapid Economic Development and the Monetary System ■— Mohinder S. Bhatia........................................................ 445 1 he Impact of Economic Development on the Balance of Payments — Alberto Morales Laureano .... 469

PART I

COMMOWEALTH OF PUERTO RICO

DEPARTMENT OF STATE

ECONOMIC PLANNING SEMINAR

CARIBE HILTON HOTEL, SAN JUAN, PUERTO RICO OCTOBER 27 - NOVEMBER 28, 1958

AGENDA

★

The Economic Planning Seminar was sponsored jointly by the International Cooperation Administration and the Department of State of the Com monwealth of Puerto Rico, with the cooperation of the Planning Board 1 and the University of Puerto Rico.

COMMONWEALTH OF PUERTO RICO DEPARTMENT OF STATE

ECONOMIC PLANNING SEMINAR CARIBE HILTON HOTEL, SAN JUAN, PUERTO RICO OCTOBER 27 - NOVEMBER 28, 1958 AGENDA Objective:

The purpose of the Economic Planning Seminar is to acquaint technical personnel from the various Latin American countries with the problems encountered and techniques employed in carrying out the work of economic planning. Such planning is intended to serve as the basis for the establishment of policies, the formulation of programs, and, ultimately, the promulgation of appropriate laws and the preparation of the corresponding budgets. Emphasis will be given during the Seminar to the practical methods which bring results that are both concrete and, insofar as possible, quantitative. The theory of economic development will be discussed in relation to the problem under study. Organization oj the Seminar: The Seminar will offer a combination of lectures, discussion periods, and working groups. The majority of the lecturers will be officials of the Government of the Commonwealth of Puerto Rico. In each case the lecturer will be a specialist in the field under discussion. For purposes of continuity the work has been divided into six units. A competent person will be placed in charge of each unit and will be responsible for coordinating and directing the intra unit discussions. There will be sufficient time to allow discussion between the lecturer and the participants, as well as among the participants themselves. Specific problems will be assigned to the latter, who ordinarily will work in groups of three or four. Participants will be furnished the necessary information to enable study of the various problems which, insofar as possible, will be based on actual information from several Latin American countries. Since the data on Puerto Rico are relatively easier to obtain, these will be the ones most frequent ly used.

PROCEEDINGS ECONOMIC PLANNING SEMINAR

PROGRAM The Seminar will last five weeks, from Monday through Friday.

Hours: Morning — 9:00 a.m. to 12:00 noon Afternoon •— 2:00 p.m. to 5:00 p.m.

The meetings will be held in the Salón Gerónimo of the Caribe Hilton Hotel. During the first week both the morning and afternoon sessions will be devoted to lectures. Thereafter the workshop will be offered in the afternoons.

Trips will ordinarily be scheduled for Saturdays. Should it become necessary to conduct them on a weekday, the Seminar will meet on Saturday in order to make up the time lost. SECTION A — LECTURES AND GROUP DISCUSSIONS First IFeek: Unit 1 — Scope of Economic Planning

Morning of Monday, October 27: Opening session. turo Morales Carrion will preside.

Dr. Ar

Greetings from the Honorable Arturo Morales Ca rrion, Undersecretary of State.

Economic planning functions from the point of view of the Chief Executive (discussion)

Governor Muñoz Marín

Afternoon of Monday, October 27: 1.

Planning as a guide and coordinating factor in government activities related to economic develop ment. Cándido Oliveras

ECONOMIC PLANNING SEMINAR

Morning of Tuesday, October 28:

1. The contribution of economic theory to economic development analysis and planning.

Luz M. Torruellas

The importance of projections in economic, social and physical planning.

Alvin Mayne Afternoon of Tuesday, October 28:

Economic projection techniques illustrated by actual pro jections for Puerto Rico.

Miguel Echenique Morning of Wednesday, October 29:

Summary of methods of estimating statistical series on net income and balance of payments. Elias Maldonado and Edna Rank

Afternoon of Wednesday, October 29:

Planning the development of natural resources.

Dr. Rafael Picó Unit 2 — Planning of Human Resources

Morning of Thursday, October 30:

Population calculation methods for use in planning.

Dr. José Janer and Dr. Ada G. de Colón Afternoon of Thursday, October 30:

Population calculation methods for use in planning (continued).

Dr. José Janer and Dr. Ada G. de Colón

PROCEEDINGS ECONOMIC PLANNING SEMINAR Entire day, Friday, October 31:

Trip No. 1 — Relative to agricultural development 1. Sugar cane plantations belonging to the Land Au thority. Discussion on seasonal unemployment prob lems, mechanization, and the development of new varieties of sugar cane. 2. Coffee producing region. The problem of replace ment of old trees, labor, etc. 3.

Lajas Valley, and the Lajas Experimental Station.

Overnight stay in La Panguera.

Return to San Juan on Saturday.

Second Week Morning of Monday, November 3: 1.

Projections of the demand for human resources, by industry, occupation, educational level, age and sex.

Dr. Miguel Echenique

2. Forecasts of supply by educational level, age and sex. Everett Reimer Afternoon of Monday, November 3:

Obtaining income statistics on the population. Carlos Vila Unit 3 — Agricultural and Industrial Development Morning of Tuesday, November 1:

Agriculture in a developing economy. The Honorable Luis Rivera Santos Afternoon of Tuesday, November 4:

Methods of analyzing agricultural resources and the demand for agricultural products. Scott Keyes

ECONOMIC PLANNING SEMINAR

Morning of Wednesday, November 5: Economic planning problems and techniques in connec tion with the development of specific programs and projects. Guillermo Irizarry

Afternoon of Wednesday, November 5: Workshop: See Section B

Entire day Thursday, November 6:

Trip No. 2 —■ factory tour 1. Sugar refineries

2. 3. 4.

Factories producing hand-woven rugs Cigarette factories Oil refineries

Morning of Friday, November 7: Methods of inducing and stimulating industrial development.

Theodore Moscoso Morning of Saturday, November 8:

Industrial growth patterns in industries ranging from those making intensive use of labor to highly-capitalized firms, industries replacing imports, and industries based on agriculture. Hubert C. Barton

Third Week

Morning of Monday, November 10: Problems of choice of site. — Essential requisites for the location of industries and industrial complexes.

Rubén Sánchez

PROCEEDINGS ECONOMIC PLANNING SEMINAR

Unit 4 — Public Utilities and Other Basic Industries Morning of Tuesday, November 11: Public Utilities

1. Electric power Sol Luis Descartes and Victor M. Cataldo

2. Water supply and sewage systems Rafael Urrutia

Morning of Wednesday, November 12:

Planning of internal transportation: necessary estimates and project development.

The Honorable Roberto Sánchez Vilella and David Ladin

Morning of Thursday, November 13:

External transportation: necessary estimates and pro ject development. Eduardo García and Miguel Echenique

Unit 5 — Social and Physical Planning

Morning of Friday, November 11: Social planning — general concepts Cándido Oliveras

Morning of Saturday, November 15: Trip No. 3. a.

Hydroelectric and thermoelectric plants

New port development

Sewage disposal plants

ECONOMIC PLANNING SEMINAR

Fourth Week

Morning of Monday, November 17: Development of education. Efraín Sánchez Hidalgo and Berelsford Hayward

Morning of Tuesday, November 18:

Social welfare and public health planning and their relation to the budget.

Dr. Guillermo Arbona Morning of Wednesday, November 19:

1. Regional planning. Carlos Alvarado and Scott Keyes

2. Urban planning. Telésforo Carrero Entire day Friday, November 21:

Trip No. 4 — Social welfare, educational, and housing institutions.

Saturday, November 22: 0 p e n Fi¡th. Week

Unit 6 — Financial Resources Morning of Monday, November 24: 1. Estimating financial resources and the problem of how to increase them.

The Honorable José Ramón Noguera and Felipe Viscasillas

2. External sources of financing. Roberto Montalvo

PROCEEDINGS ECONOMIC PLANNING SEMINAR Morning of Tuesday, November 25: The capital investment program and required informa tion. Eduardo Rivera

Morning of Wednesday, November 26: Budget of ordinary expenditures

Afternoon of Thursday, November 27: Social function.

Morning of Friday, November 28:

1. The impact of rapid economic development on the monetary system.

Mohinder S. Bhatia 2. The impact of economic development on the balance of payments.

Alberto Morales and Alvin Mayne

SECTION B — WORKSHOPS Second Week, afternoons Wednesday, November 5

Project 1

Population projections

Friday, November 7

Project 2

Population projections

Third Week, afternoons Monday, November 10

Project 3

Projections of the labor force Economic projections in general Employment estimates Demand for electric power Educational programs

Tuesday, November 11

Wednesday, November 12 Thursday, November 13

Project 4

Friday, November 14

Project 6

Project 5

Fourth Week, afternoons Monday, November 17

Educational programs

ECONOMIC PLANNING SEMINAR

Tuesday, November 18

Project 7

Wednesday, November 19

Project 8

Regional and urban planning Regional and url n planning

Fifth Week Monday, November 24 Tuesday, November 25 Wednesday, November 26 Friday, November 28

Project 9 Project 9 Project 9 Project 10

Development plan Development plan Development plan Participation of mem ber- in the discussion of problems of their respective countries.

SECTION C — LECTURERS

1. 2.

4. 5. 6. 7. 8. 9.

10. 11.

12.

13. 14. 15.

16.

Governor Muñoz Marin — Governor of Puerto Rico since 1948 Arturo Morales Carrion, Undersecretary, Department of State of the Commonwealth of Puerto Rico Rafael Picó, President, Government Development Bank of Puerto Rico Luz M. Toruellas — Coordinator, Graduate Programs in Eco nomics, University of Puerto Rico Cándido Oliveras — President, Puerto Rican Planning Board Alvin Mayne — Director, Bureau of Economics and Statistics, Puerto Rican Planning Board Miguel Echenique — Economic Advisor, Puerto Rican Plan ning Board Elias Maldonado —■ Director, Statistical Division of the Plan ning Board Edna Ranck — Chief, Net Income and Cross Product Section, Puerto Rican Planning Board José Janer — Chief, Biostatislical Section of the School of Medicine, University of Puerto Rico Everett Reimer — Executive Secretary, Human Resources Com mittee Carlos Vila — Director, Bureau of Labor Statistics, Depart ment of Labor of Puerto Rico Luis Rivera Santos — Minister of Agriculture Scott Keyes — Economic Advisor. Planning Board Guillermo Irizarry — Executive Secretarv of the Agricultural Council Hubert C. Barton — Director. Office of Economic Research. Economic Development Administration

PROCEEDINGS ECONOMIC PLANNING SEMINAR

Teodoro ¡Hoscoso — Administrator, Economic Development Administration 18. Rubén Sánchez — Vice President, Industrial Development Company of Puerto Rico 19. Ada G. de Colón — Statistician, Biostatistical Section, School of Medicine, University of Puerto Rico 20. Sol Luis Descartes — Executive Director, Water Resources Authority 21. Víctor M. Cataldo — Chief, Electric Power Utilization Di vision, Water Resources Authority 22. Rafael Urrutia — Executive Director, Water Supply and Sewage System Authority 23. Roberto Sánchez Vilella ■—• Secretary of Public Works and Secretary of State 24. David Ladin — Economic Advisor, Planning Board 25. Eduardo Gracia — Executive Director, Port Authority 26. Efraín Sánchez Hidalgo — Secretary of Education 27. Berelsford Hayward — Advisor, Department of Education 28. Guillermo Arbona — Secretary of Public Health 29. Carlos Alvarado — Assistant Executive Vice President, Plan ning Board 30. Telésforo Carrero — Member of the Planning Board 31. José Ramón Noguera — Secretary of Finance 32. Felipe Viscasillas — Director, Office of Economic Research, Department of Finance 33. Eduardo Rivera — Director, Bureau of Public Works Pro grams, Puerto Rican Planning Board 34. Ramón Garcia Santiago —■ Director, Budget Bureau, Office of the Governor 35. Mohinder S. Bhatia — Economic Advisor, Planning Board 36. Alberto Morales — Chief, Balance of Payments Section, Plan ning Board 37. Roberto Montalvo — Vice President, Government Develop ment Bank

17.

ECONOMIC PLANNING SEMINAR October 27 — November 28, 1958

INAUGURAL SESSION

GREETINGS TO DELEGATES

Address by Dr. Arturo Morales Carrion, Undersecretary of State of the Commonivealth of Puerto Ric

INAUGURAL SESSION

GREETINGS TO DELEGATES Address by Dr. Arturo Morales Carrion,

Undersecretary

of State of the Commonwealth of Puerto Rico

Mr. Governor, Presidents of the Legislative Assembly, distin guished visitors and friends: On behalf of the sponsors of this Seminar, the International Cooperation Administration of the United States and the Depart ment of State of Puerto Rico, it gives me great pleasure to extend a cordial welcome to all of you participants. In a few minutes Governor Luis Muñoz Marin will greet you in the name of the people of Puerto Rico. This Seminar is an outgrowth of Puerto Rico's desire to of fer its experience as a people to her sister nations in the Hem isphere. Some years ago, when President Harry S. Truman an nounced his historic Point IV doctrine, Governor Luis Muñoz Marín suggested that the island serve as a center for study and observation for those friends in the hemisphere or in other parts of the world who might be interested in examining our ex periences and what we have attempted to accomplish, particularly in the fields of social and economic development. This marked the beginning of a program which has greatly expanded in recent years. It has always been our thought that our experience should be presented in both its positive and negative aspects; in its achieve ments and failures; in its well-taken measures and its errors. We intended that our Technical Cooperation Program, an experiment in living together, afford us at the same time an opportunity to learn from visitors from other countries. The Seminar which we are inaugurating today is a new out growth of that program: Its focal point or primary objective is to explore a subject of vital interest for the entire Hemisphere — economic development planning. As you will see, planning is a basic element in the collective life of Puerto Rico. For this reason those of us who organized this Seminar felt that, rather than making the emphasis theoretical

PROCEEDINGS ECONOMIC PLANNING SEMINAR

or academic, it was preferable to follow a practical approach and place the participants in contact with persons who are actually responsible for performing the planning task in the government. Here I refer not only to technical planners as such, but to all of ficials from the Governor on down who exercise that function and could explain the planning process to you not as a merely theore tical activity, but also as an assignment which calls for continuous, everyday decisions. Such is the pragmatic base of reality on which we have cen tered the experiment that begins this morning. Outside the sphere of these technical deliberations the Depart ment of State of Puerto Rico desires to extend to you the hospital ity we customarily offer all the friends who visit us. This includes the hospitality of the new International Center where you will be most welcome and which you are urged to make your second home during your stay in our country. Some time ago we adopted a motto — a motto that we feel very deeply in our collective life. That motto is: “There are no foreigners in this land.” With that I take my leave of you and present to you now the Governor of the Commonwealth of Puerto Rico, Luis Muñoz Marin.

ECONOMIC PLANNING SEMINAR

October 27 — November 28. 1958

ECONOMIC PLANNING FUNCTIONS FROM THE POINT OF VIEW OF THE CHIEF EXECUTIVE

Address delivered by the Honorable Luis Muñoz Marín,

Governor of the Commonwealth of Puerto Rico

October 27, 1958

■

INAUGURAL SESSION Address by the Honorable

Luis Muñoz Marín Governor of the Commonwealth of Puerto Rico

ECONOMIC PLANNING FUNCTIONS FROM THE POINT OF VIEW OF THE CHIEF EXECUTIVE Dear friends: My cordial greetings to all of you in the name of Puerto Rican hospitality. It is my fervent desire that this Seminar pro vide valuable teachings, investigation and inspiration for all who participate. Briefly and in broad outline I should like to discuss the func tion and scope of economic planning from the point of view of the Chief Executive of a government. The basic functions of the head of the government include interpretation, education and management as regards the desires of the people, as well as the formulation of an integral program to bring those desires to fruition. The program will have been discussed in general outline with the electorate during the campaign preceding the election of the Chief Executive and other Constitu tional officials — in Puerto Rico the Governor and the Congress men. The Chief Executive’s duties also comprise the formulation of specific proposals for presentation to the legislative branch covering the part of the over-all program which he deems should be authorized for the following fiscal period. Finally, he is re sponsible for administering the departments of the executive branch in such way that apart from handling the routine tasks of govern ment they will encourage development of the program with the greatest efficacy. It is in the above connection that I should like to speak of economic planning which, in my opinion, should serve the follow ing functions: To develop technical elements to measure, project, correlate and evaluate the various economic factors which the dynamics of the future are bound to produce, whether properly guided or not, and to do it in such way that orderly and conscientious guidance

PROCEEDINGS ECONOMIC PLANNING SEMINAR

will be provided for economic development. The aim should be to mold the future insofar as possible to conform to the image com posed of the aspirations of the people. A further function of planning is to manage these tools, es pecially with regard to the coordination of forces and factors, in such way as to produce recommendations on the order of priority which will best serve the endeavor to convert that image to reali ty —■ external and internal communications, preventive medicine and curative health programs and institutions, the development of electric power, proper land use, methods of education to foster the skills called for by the desired economic development and, of course, the necessary and prospective financial resources for carrying out the great undertaking in its entirety. Doubtlessly, in the hurry of preparing this message 1 have overlooked certain elements; how ever. these will be taken up in the course of the five weeks of this Seminar. Things economic constitute only a part of the aspirations of a people — civilization, of course is a great deal more than economics — but the adjustment of economic programs to social, cultural and political aims of the country is a function of the planning organiza tion. The economic objective is to abolish poverty. Cultural ob jectives are to provide high-quality education that will develop human skills so varied and numerous that poverty will be abolished permanently, and to afford each person as much humanistic in struction as he is prepared to assimilate and the best of health that the nature of his physique permits him to maintain. Another cultural goal seeks to endow the people as a whole with the spiritual capacity to keep themselves morally sound and preserve their selfrespect at the same time they are genuinely anxious to learn from others, avoiding nationalistic limitations or colonial ties. The political objectives in Puerto Rico’s case center on finding a means of perfecting its newly-created status and rendering better service to the region of the world of which it forms a part. In Latin America in general the political aspiration is to strengthen the roots of political liberty and contribute to a better union between its own people and between the peoples of America as a whole. Whatever the objectives, in order to he able to fulfill his man agement responsibilities the Chief Executive must possess definite convictions with respect to the general direction his people want to go and in which he is prepared to guide them. To the extent to which such general aims are of a nature legitimately subject to government action the Chief Executive, as I mentioned earlier, will hold himself responsible for formulating a program that will make their realization feasible. He cannot be a passive element, a mere instrument of public opinion. His duty is to guide public opinion through reasoning and persuasion, in the knowledge that ultimately he is at the disposal of public opinion — i.e., when he runs the risk

ECONOMIC PLANNING FUNCTIONS

that the public will withdraw their confidence in him at the poll-. Remember, though, that the confidence I refer to is not the type given an errand-boy: it is that which is conferred on an advisor. These procedures crystallize the image the people hold of their future. The Executive’s leadership does not manifest itself solely with respect to the broad objectives of the society in which he functions. but also in the creation and development of the means for achieving these aims and in overcoming superficial and transitory pressures. In this part of his ardous task, an advisory role of the utmost im portance can be played by economic planning, in conjunction with programs, the evaluation of priorities, and projections of the impact which the forces presently at work will be likely to create in the future. The interrelation between economic and social factors — the latter including cultural elements —■ is one of the points over which planning must exercise constant vigilance and scrutiny. This is basically a function of the Executive, but the help that he can obtain from planning in this case is highly important. Although certain aspects of economic development in a given society pave the way for the achievement of many of its social objectives, we should never forget that there is always a danger that economic development will acquire certain characteristics that lessen the op portunity of attaining what the peoples consider socially desirable. The human spirit should direct, not be directed by. economic progress. All orderly' planning implies sacrifice at one time or another for certain of the factors involved. Should we proceed rapidly in order that the coming generation achieve the desired levels as soon as possible, at the cost of sacrifices on the part of the present generation? Should the achievement of the longed-for standards and ways of life be postponed for years or even generations in order Io invest financial resources in alleviating the situation of those of the present generation who would suffer the immediate adverse consequences of. for example, very rapid mechanization, withdrawal of the opportunities of adult instruction for those unable to educate themselves in their youth, greater abandonment of old ace and the victims of unfortunate circumstances such as illness, accidents, or orphanage? Neither the Executive nor the legislators can shift responsibilityto the planner for the resolution of the conflicts which mav arise here between the mind and heart. However, the planner can con tribute to a belter understanding of the magnitude of the problem and the impact which the decisions of the Executive and legislature can be expected to have on the life and hopes of the people. In a good democracy, once the program is formulated, the Ex ecutive submits it once again to public discussion in order to

PROCEEDINGS ECONOMIC PLANNING SEMINAR

demonstrate that in abundant detail it reflects the decision of the people on matters that were the object of electoral debate and set tlement. He discusses it with the people in press conferences, mes sages to the Legislative Assembly, speeches, and official documents. By custom and by law in Puerto Rico detailed budgetary recom mendations are submitted for approval to the legislative branch, covering the executive program for the next fiscal period. We project the figures for five additional years, not with the aim that such a long-term budget be given the force of law but to give the Congress and the people a broader perspective with regard to the continued development of the basic program. At this point economic planning takes on decisive importance, as does the physical planning function which is the consequence of the former. On the basis of appropriate studies an over-all view is obtained of the administrative decisions that must be made in point of time. Many of these decisions have to do with the manner in which available resources should be channeled to alternative object ives ■— resources that are always in short supply in relation to the people’s great program for their future. The decision does not necessarily involve approving one alternative and rejecting another, but rather determining when one and the other can be taken care of: Frequently conflict arises between providing fewer benefits for fewer people right away, rather than greater benefits for more people, but later. Economic planning points up these alternatives in concrete and specific terms, thus affording the Executive and the legislative branches ample knowledge of the consequences of their decisions and contributing to the education of the people with regard to the affairs of their government. Economic planning also functions in the case of spatial decisions: that is to say, the choice of regions of the country in which this or that development project is to be carried out, in keeping with the image which the community has formed of its own future. The economic planner does the groundwork for the physical planner. He also assumes the responsibility for providing the administrator with the necessary financial information that bears so close a relationship to the capacity of a government to implement its economic and social aims. Another function of economic planning is to encourage changes in government organization which will better adjust it to carry out the over-all program in its numerous constituent parts. The economic planner’s advice is not limited to what the government should undertake as such, but extends also to measures that can be taken by the government to stimulate and channelize private initiative so that the latter plays its proper role in the develop ment of the people’s basic program. In the latter sense, for ex ample, the planner may recommend regulations for the banking system that will channel private funds toward the most important

ECONOMIC PLANNING FUNCTIONS

needs of the economy; or, he may give counsel on legislation governing tax exemptions or making provision for subsidies. Economic planning, just as planning in general, not only performs an important service for the political function of govern ment but in a measure refines and exalts that function by diminish ing the pressures that seek special privileges or encourage favoritism •— pressures that must be counted among the inherent weaknesses of a democracy. Planning injects into the governmental process the imperative element of rational justification, and safeguards against arbitrary decision, whether at the executive or legislative levels. In this fashion it fulfills a high mission in democracy and democratic education. I hold high hopes for America as a result of meetings such as the one which begins today. I trust that the atmosphere of fraternal and dedicated intellectual cooperation which prevails in this type of discussion will eventually exercise some influence on bringing America closer to the creation of regional unions such as the one beginning to take form in Central America. Perhaps it will lead to a common market of the Americas, or pave the way for the attainment of an aspiration expressed a few days ago by the illustrious Peruvian newspaper man, Pedro Beltran: A great and true community of American peoples, the contribution of our Hemis phere to the pressing worldwide need of overcoming the stunting effects of nationalistic restrictions in the era of the great terror — and great hope — of nuclear power.

ECONOMIC PLANNING SEMINAR

October 27 — November 28, 1958

THEORETICAL CONTRIBUTIONS TO ECONOMIC DEVELOPMENT ANALYSIS AND PLANNING By Luz M. Torruellas, Ph. D. Department of Economics Faculty of Social Sciences University of Puerto Rico

Lecture prepared for the Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico, with the cooperation of the Planning Board and the University of Puerto Rico

THEORETICAL CONTRIBUTIONS TO ECONOMIC

DEVELOPMENT ANALYSIS AND PLANNING By Luz M. Torruellas, Ph. D. Department oj Economics Faculty oj Social Sciences University of Puerto Rico

I. The organizers of this Seminar have assigned me the task of summarizing the theoretical contributions to economic develop ment analysis and discussing their relevancy for planning. The assignment is highly optimistic, and 1 undertake it with extreme humility, fully aware of the many omissions in which I will almost certainly incur. For one thing, existing literature on these two subjects — economic development and planning — is very ex tensive. We would be hard put to find any other subjects in the economic literature of the last decade that exceed these in popularity and awakened interest. Both have become the topics in vogue among economists. It could not have been otherwise, since the end of the Second World War brought with it the realization of the promise and significance of economic development (and of planning as an essential tool) in alleviating the poverty of the ■world's peoples. The war demonstrated up to what point it is possible to develop efforts consistent with a greater and more effective utilization of human potential and other resources. This, together with the realiza tion that in many instances political stability and national security themselves were threatened by the depressive effects of economic poverty, prompted governments and peoples to foster economic development with greater determination and effort. It is probable that the significance of the differences in standards of living between certain peoples and others had never been demonstrated so forcefully before. In 1949, according to a United Nations statistical report1, 54 percent of the world's popula tion lived in countries with a per capita income of less than $100 dollars, while 7 percent lived in countries having a per capita in come in excess of $1,000 dollars yearly. These differences do not appear to have been corrected significantly since that time: I would say rather that they have persisted and have even become more1 1

"National and Per Capita Incomes of 70 Countries." United Nations. Statistical Papers, Scries E„ No. 1, New York, October, 1950.

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marked. Even though these differences in per capita income ad mittedly do not present an exact picture of the relative standards of living among countries, they unquestionably do reflect the enormous differences which cannot help but give cause for concern, particularly when one remembers that to date no completely satisfactory explanation has been found of ivhy and how these dif ferences arise, to say nothing of why they tend to become ag gravated instead of diminishing. It would be absurd, however, to think that concern for economic development is a new thing. Economic historians, as we know, have wrestled with this problem since the time of the famous German school of thought, known as the “Historic German School.”2 Even recognized theoreticians such as Adam Smith, J. S. Mill, Karl Marx, A. Marshall, J. Schumpeter and others have taken up the subject prior to this time. Why, then, the new interest in the problem? The reason is decidedly not because that problem has been thoroughly elucidated (for the field is extremely vast and complex and susceptible of a far more complete development) but lies rather in a greater awareness of the issues involved and the urgent need to seek a solution. The general interest in seeking a solution of the problem of economic poverty has given rise to the creation of a series of in ternational organizations, and national governments have set about formulating plans and public policy aimed at achieving this purpose. Development planning has acquired political popularity in many cases, in the measure that improved communications between peoples and the nationalistic behavior of many of them (plus the restiveness caused by the awareness of the enormous differences that exist in standards of living from nation to nation) have awakened in the masses a determination to do their utmost to solve the problem. In the case of many peoples it is obvious that if the population grows, production and real income also have to grow — and at a more rapid rate than the population — if standards of living are to be improved. For these people it is also clear that, from an employ ment standpoint, production should increase since the expansion in the labor force resulting from demographic growth requires a constantly-expanding productive mechanism that can absorb the additions to the labor force and thus obviate an increase in un employment. Another economic truth with respect to these na tions is that if an increase in net capital investment augments over all productive capacity, real income must rise proportionately if the 2 According to these students, the economy in its evolution passes through a scries of stages or structural changes that may he distinguished one from the other. Their principal concern was with discovering the distinctive characteristics of each stage and the manner in which the economy moves from one to another. They also studied the role that public policy plays in the development of a nation's productive resources.

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2rj

depressive effects brought on by “idle capacity’’ are to be avoided. How can all this be accomplished? This is the question which we are constantly asking ourselves as we struggle with the problem. To find the answer is difficult but imperative. Where is the key? I believe that the key to the answer to this question, and to com prehending the development problem itself, consists of understanding the theoretical foundation of the problem. Failing that, it is im possible to compile in orderly fashion the great mass of data which the problem comprises, much less make sense of it. I he next question, then, is where to look for the necessary guide to theoretical analysis when we are told that there is no single generally-accepted theory of economic development, despite the great wealth of literature on the subject. It is true that such a theory has yet to be developed and the majority of the theories formulated to date are not ap plicable to countries such as ours or yours. Nonetheless, until such time as an appropriate theory is developed, a critical survey of the representative thinking of the various schools of theoretical thought that have taken up the problem in one way or another can lead to a better perspective of the problem itself and of the neces sary theoretical bases that must be taken into account. Such a survey can help us understand why the theory I refer to has not yet been fully developed. If. To permit an orderly sequence of thought, let us conduct the survey by following the fundamental landmarks on the road followed by economic theory in its evolution up to the present. W e shall adopt for this purpose the classification used by Oreste Popescu in his introduction to the Spanish translation of Augusto Losch’ Spatial Theory of Economics,3 and outline in detail the theories within each stage that were most pertinent to the problem of economic development or growth. The first of these stages, which according to Popescu is also the longest, is characterized by gaining knowledge of. and analyz ing, the economic prenomenon in its substantive dimension. This stage, ushered in by the appearance of Adam Smith's famous work. firmly fixes the bases for later economic analysis by formulating and perfecting the necessary theoretical foundation leading to an understanding of the problems of value, price and distribution, mon ey and credit, the accumulation of wealth, international trade and general equilibrium. It is true that after the advent of the so-called classical economists, the greater part of the students belonging to this era did not appear to be concerned with the problem of growth since they concentrated their attention on the analysis of static and short term problems. It is also true that many of the suppositions on which 3

Augusto Losch, Spatial Theory of Economics, Spanish translation. Library of Economic Sciences, Editorial El Ateneo, Buenos Aires, Ar gentina, 1957.

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their theories were based are inadequate £or purposes of analyzing the growth problem. However, we should recognize that without the substantive dimension they gave to the economic phenomenon, it would have been impossible to proceed later to an understanding of the problem of economic growth. Let us see. One of the principal concerns of the so-called “classical” econ omists, beginning with Adam Smith, was the problem of the long term growth of income as the principal means of increasing national wealth and standards of living. They 'wanted to discover why and how this process took place. With that aim in mind, they parted from the supposition of the existence of a stable and stationary equilibrium, characterized by given rates of growth in the popula tion, capital formation, production techniques, real income, etc.; then they attempted to explain how the economy passes from this state of equilibrium to another, also in equilibrium, but characterized by different rates of growth. Smith reveals this concern in the title of his famous work, “Inquiry into the Nature and Causes of the Wealth of Nations.” For Smith and the classical economists the key to all progress or growth lay in the natural tendency of each human being to achieve a maximum of material well-being — a tendency which induces him to trade his surplus production (i.e., in excess of his own consumption needs) for those things which he needs but does not produce. This tendency toward interchange, encouraged by the egoistic motivation of self-interest, leads to the division of labor and specialization, 'which in turn make it possible to develop greater ef ficiency of labor, higher production, and increased income from the interchange. Smith maintained that the división of labor and the increased familiarity with, or mastery over, a given calling encourages man to invent or experiment with new methods of production and/or improve the methods currently in use. These advances, in turn, stimulate a greater division of labor and in creased productivity, which in their turn facilitate a greater ac cumulation of wealth and increased income. For the classical economists, the axis on which the whole growth process turns is the entrepreneur or capitalist since he, in response to competition from others, is the one who undertakes the accumu lation of capital and introduces the technological advances which lead to greater division of labor and the resultant increments in productivity which characterize economic growth. By eliciting the cooperation of all for the satisfaction of needs and desires of the individual, the division of labor and interchange constitute the motive force for progress and social well-being. After analyzing the tvhy of growth, the classical economists proceeded to explain how it occurs, formulating a complete theory which links the fundamental aspects of the process to the labor factor as the sole source of value. This theory reached its maximum re-

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finement with David Ricardo and John S. Mill4, and was resorted to by Karl Marx56 when presenting his vision of how capitalism would be destroyed by the avarice of the capitalist and the con sequent class struggle. However, it was precisely because this ex planation of the problem of value was found to be indefensible that the theory rapidly fell into discredit toward the end of the last century when the so-called “neoclassical” school reacted vio lently against it. The classical explanation of why growth oc curred was not questioned, but rather the theoretical explanation offered by the classical economists of the problem of value. There fore, interest became centered more and more on the purely theoretical aspects until finally it was completely divorced from the context of thought regarding long-term development and turned instead to the analysis of the problem of static equilibrium or the interrelations between the various sectors of the economy at a given moment and their bearing on the problem of value and price — in other words, analysis of the substantive aspects of the problem of how to distribute productive resources among the various possible uses in order to achieve the most efficient allocation thereof and, in consequence, a stable equilibrium. However, even in this abstraction we find valuable contributions to an understanding of the problem of economic development: Is not this one of the fundamental problems that must be dealt with by all those concerned with economic development planning? Lacking an un derstanding of the theoretical foundations of the problem of the utilization of resources, to what degree would sound planning be possible? The sole exception to the concentration on static and short term analysis was the study of the fixing of the rate of interest — the price which links the present to the future. The neoclassical discussion of the determination of the rate of interest5 built the bridge which made it possible to penetrate deeper into a territory already opened up by the classical economists: namely, the problem of the accumulation of wealth and the resultant economic growth. It is considered that the foregoing aspect constituted the greatest contribution of the neoclassic group to the theory of economic de velopment. It was they who by accepting the possibility of marginal 4 David Ricardo, Principles of Political Economy and Taxation (1817), and John S. Mill, Principles of Political Economy with Some of their Applications to Social Philosophy (18-18). 5 Karl Marx, Contribution to the Critique of Political Economy (1859), and Capital (1867-94). 6 Knut Wicksell, Lectures on Political Economy (1901). Also, J. B. Clark, Distribution of Wealth (1899), Essentials of Economic Theory (1907): Gustavo Cassel, Nature and Necessity of Interest (1903), The Theory of the Social Economy (1918); Irving Fisher, Nature of Capital and Income (1906), The rate of Interest (1907).

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substitution of productive resources (having abandoned the clas sical supposition of fixed production ratios) demonstrated that it is possible for an accumulation of capital to occur without neces sarily implying an increase in the labor force; further, that in the measure in which capital increases in relation to the population, total and per capita income also increase. Likewise, they showed that if the capital accumulation is io expand, savings must in crease, and pointed out that the level of savings is a function of the level of income and the rate of interest: In other words, at an increased income level the higher the rate of interest, the greater savings will he. These ideas are very necessary to an understand ing of the problem of growth and were subsequently more fully elaborated by J. M. Keynes and his disciples78 9. Another of the great contributions of this stage to economic development analysis was the perfecting of the monetary and credit theory3. This was accomplished by integrating the price theory with the monetary and credit theory via the interest rate —■ a process which later was to facilitate the transition to dynamic analysis. To this stage we also owe the perfecting of the international trade theory3, which in troduced into the analysis a consideration of the disparity in avail able resources from one country to another, and even between regions of a single country. This led to an examination of ad justment problems arising from the transfer of resources (partic ularly capital) — a matter of such vital interest and significance for countries in the process of development. However, we should mention that the analysis was incomplete, for these students of economics were unable to identify the causal links between eco nomic inequalities, to say nothing of why the latter tend to per petuate themselves. This chain of cause and effect still requires a more complete elucidation. This exposition of the substantive contributions to the theory of economic development during this stage would not be complete without making mention of the macroeconomic analysis which reached its maximum refinement with Keynes and his followers. Keynes centered his attention on the analysis of the factors that cause fluctuations in the total volume of employment and income and arrived al the conclusion that the volume of employment in 7 J. M. Keynes, The General Theory of Employment, Interest and Money (1936); J. R. Hicks, Value and Capital (1939); and others. 8 L. Walras. Elements D'Economie Politique Pure (1900); Alfred Marshall, Money, Credit and Commerce (1923); Knut Wicksell, Interest and Prices (1898); and others. 9 C. K. Hobson, The Export of Capital (1914); A. C. Pigou, The Theory of Foreign Exchanges (1922); Alfred Marshall, Money, Credit and Com merce (1929); B. Ohlin, Interregional and International Trade (1933); Jacob Viner, Studies in the Theory of International Trade (1937); G. Haberler, The Theory of International Trade (1936).

THEORETICAL CONTRIBUTIONS any economy is a function of the volume of income and that the latter, in turn, depends on the magnitude of consumption and in vestment. In other words, an incease in real national income im plies an increment in productive capacity which brings about an increase in employment; likewise, a rise in the level of invest ment or consumption, or both, leads to an increase in income. Having established this relationship, as well as that existing be tween consumption, savings and investment, Keynes became inter ested in conducting a more thorough investigation of the factors that determine consumption and investment. His analysis under scored the importance of the psychological determinants of con sumption and investment, which he identified as the propensity to consume, the propensity to save, and liquidity preference — con cepts with which all of you are no doubt familiar. Perhaps the greatest contribution made by Keynes and his disciples to economic development analysis is the role which he ascribes to net investment in the process of income growth through the multiplier effect, and his discussion of how private investment can be supplemented by public investment. He pointed out how an increase in net investment produces an increase in income equal to a multiple of the original net investment; this multiple he terms the multiplier and defines it as the reciprocal of the propensity to save. Further, he taught how public investment can play a vital role in the growth process during periods when private investment does not meet the requirements of the system. Since countries in early stages of development have a low propensity to save, the multiplier in their case may be expected to be high. Thus in creases in net investment will produce more rapid increases in in come. It is well to point out, however, that human capabilities. the number of technicians, technology itself, etc., produce condi tions that vary from one country to another. This fact must be taken very much into account when applying the multiplier theorv to these countries. Despite the fact that the Keynesian model of the determina tion of income and employment is primarily static in nature and applies to short-term situations, it laid the foundation for many of the advances in the economic-growth theory produced durins the last two decades. These new developments in theorv belong to the so-called second stage in the evolutionary journey of the science of economics. According to Popescu’s classification, this second stage is char acterized by an awareness and analysis of the economic phenome non in its dimension of time — that is to say. in its dynamic dimension. The time factor enters into economic analysis very subtly at first with the recognition of different time periods in theanalysis of the problems of the company and the industry (even though interest in short-term problems predominates). Somewhat;

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later, the analysis becomes concerned mainly with the “secular” considerations of ecomonic development or growth. During this stage theories were perfected with respect to the phenomenon of cyclical and secular fluctuations. Moreover, economists of this period were successful in correcting the deficiencies of the general equilibrium theory — i. e., the theory of the interrelations between the different sectors of the economy. This was accomplished by including different periods of time when analyzing the relations between variables. Had it not been for the insertion of the time element, our understanding of the dynamics of the problem of economic development could not have reached its present level. The most outstanding exponents of this stage are Joseph Schum peter, of the “Swedish school’,, and post-Keynesian students J. R. Hicks, R. F. Harrod, E. Domar, W. J. Baumol, D. Hawkins, and others. In 1911 Joseph Schumpeter10 presented a theory of the evolu tion of economic development — ■which actually can be termed a theory of the economic cycle. Making use of the theoretical concepts of neoclassic thought (although also calling to mind Karl Marx and the classical economists), he outlined a truly dynamic theory in which the entrepreneur, the accumulation of wealth and technological innovations constitute the axis of the development pro cess. To Schumpeter, the entrepreneur sets in motion the forces of growth through the introduction of innovations and the resultant ac cumulation of capital. In this he is aided by banking and credit in stitutions which accelerate the process by creating purchasing potv er and placing capital funds at his disposal. However, Schumpeter maintains, this process lacks stability and harmony because the innovations of entrepreneurs do not occur in a harmonious and continuous flow, but in sporadic waves. Adaptation to these cir cumstances is bound to be uneven. In this way cyclical and sec ular fluctuations originate as manifestation of the interaction be tween growth-stimulating and depressive factors. The transition from static to dynamic analysis, 'which began to make itself felt in the second decade of this century, matured during the period between the two world wars, culminating in postKeynsian thought. The “Swedish” or “Stockholm” school of thought made what was probably the major contribution to this process by introducing the “ex-ante” and “ex-post” considerations into eco nomic analysis.11 Aware of the role played by the entrepreneur in 10

Joseph Schumpeter, The Theory of Economic Development (1955). English translation by A. Opie, Harvard University Press, Cambridge, 1934.ii

ii See the works of E. R. Lindahl, G. Myrdal, and especially that of B. Ohlin, "Some Notes on the Stockholm Theory of Saving and In vestment,” Economic Journal, March and June, 1937.

THEORETICAL CONTRIBUTIONS the growth process, the Swedish economists became interested in analyzing the motivations and effects of the changes in the deci sions of the entrepreneur in connection with a given problem —why decisions taken yesterday with respect to the future may be dif ferent once that future arrives. Their analysis took into consider ations different periods of time, some of which they called "ex-ante (an anticipation of the future) and others, “ex-post" Íalready past'. Thereafter they constructed a series of theoretical models explicable in mathematical terms for the purpose of determining the effect of variations in the decisions of entrepreneurs. Such models lead to an explanation of the way in which entrepreneurs project their own future. Since each decision change naturally is based on giv en suppositions that characterize the situation or model under study, the latter is somewhat limited in application. Many students have continued to develop the foregoing tech nique of explaining economic development on the basis of projec tions and theoretical models founded on given assumptions and characterized by the consideration of different periods of time. Their efforts have culminated in the application of the Keynesian model to long-term situations. Of these, I should like to sum marize the growth models constructed by E. Domar and R. F. Harrod'2, because they have attracted a great deal of attention and have served as the basis for the writings of many students of eco nomics in recent times. The significance of the models by Domar and Harrod lies in the fact that they decidedly introduced into the analysis the concept of growth. To do this it was sufficient to break out of the narrow framework of a period or year to project the meaning of a constantly-increasing national income within a true conception of time. Moreover, they opened new horizons in the analysis of the development problem by abandoning the idea of stable equilibrium which up to that time had dominated economic analysis, in favor of a concept of dynamic equilibrium that is relative in nature. Equilibrium, in their view, required only that the various elements of the economy “have the proportions among themselves which arc considered necessary to maintain or accelerate the process of subsequent growth”. It is not only a matter of encouraging growth of a given sector or sectors of the economy, but of achieving maxi mum harmony in the growth process at the same time that the rate of growth presses constantly upward. The important thing, in the view of these economists, is not to determine the conditions of the 12

Evsey Domar, "Capital Expansion, Rate of Growth and Employment." Econometrical, April, 19-16, and "Expansion and Employment," Amer ican Economic Review, March, 1947; R. F. Harrod, "An Essay in Dy namic Theory," Economic Journal, March 1939, and Towards a Dynamic Economics, McMillan Co., London, 1918.

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current equilibrium but those that will lead to a future balanced and continuous growth. What are these conditions? Domar and Harrod state that the first basic condition for balanced development is a rising rate of investment. But that is not enough. It should be remembered that investment not only is capable of creating income via the multiplier (as Keynes pointed out), but also creates productive capacity. When this happens, it is necessary that future investment decisions take into account the need to make use of the additional productive capacity resulting from the investment. Therefore —and this is a second condition— production and income should increase in proportion to the increase in productive capacity, thus avoiding the depressive effect of the existence of “idle capacity”. Obviously, only a well-defined rate of income growth can achieve this result. How should we go about de termining the rate of income expansion that will be consistent with balanced growth? The rate of income growth, in the opinion of of these students, should be equal to the rate of investment, which in turn is equal to the product of the marginal propensity to save and the capital-output ratio (the increase in the productive capacity of the society). The use of capital-output ratios as an analytical tool in con nection with the problems stemming from investment in the develop ment process has gained wide currency in the last two decades, in the measure that economic analysis has progressed in its spatial di mension and specialized analytical techniques, such as linear pro gramming, the inpul-output method, and long-term forecasting, have begun to be applied to the analysis of development problems and the dynamics of localization.13 The introduction of distance or space as another variable, in addition to time, in the analysis of the problems of general equilib rium and economic interdependence completes the evolutionary cy cle of economic theory up to the present. This development has facilitate a better understanding of the problems involved in development planning on a regional as well as worldwide scale. On this point it is well to remember that the proper application of many of these theoretical advances to the problems presented 13 Sec the works of AV. AV. Leontieff, "Input-Output Analysis...,” Amer ican Economic Association, Papers and Proceedings, May, 1949: The Structure of the American Economy, 1919-1939, New A'ork, 1951; Studies in the Structure of the American Economy, New A'ork, 1953. Also, AValter Isard: "Interregional and Regional Input-Output Analysis: /A Model of a Space Economy," Review of Economics and Statistics, November, 1951; "Some Empirical Results and Problems of Regional Input-Output Analysis.” in Leonticff’s Studies in the American Econ omy; "Regional and National Product Projections and their Inter relations," Long-Range Economic Projections, Studies in Income and Wealth, Vol. XVI, Princenton University, N. J.. 1954.

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by development in the so-called “underdeveloped” countries still requires refinement. For example: Although it is true that there is a positive relationship between the increases in productive ca pacity resulting from net investment, and increments in income, it is difficult to establish the magnitude of that relationship a priori since the action of the capital-output ratios can be affected by other variables in the system. Consider the case of agriculture, where climatic conditions can exercise a great deal of influence on the yield obtained from the land. In such a case the capital-output ratio may be expected to be lower than in other industries. The quality of the labor force is another factor that can affect the action of the capital-output ratio: A skilled and mobile labor force, for example, will permit a greater yield per unit of capital employed than an unskilled and immobile labor force. There is another problem connected with the use of capital output ratios that warrants more thorough investigation, particular ly with respect to areas in process of development: Do capital-out put ratios remain constant during the process of development? If not, in what way do they vary? Studies conducted up until the present (largely with reference to already-developed countries i do not appear to provide conclusive evidence on this point, although the majority do point to a reduction in capital-output ratios in the measure that economic growth gains momentum. Colin Clark'4, for example, maintains that it is to be expected that capital-output ratios will decrease as development progresses, because per capita income increases will occasion a variation in the composition of production in favor of tertiary industries (that is. industries having lower capitalization). It might be argued that while this seems to be true, the speed with which it occurs will depend on the nature of the tertiary and secondary industries that are developed. (In certain tertiary industries the capital-output ratio is higher than in some primary and secondary industries). It will depend further on the rapidity with which the economy can move in that direction. In those countries in which growth has not attained its maximum development, and provided that the remaining conditions are favor able, it is logical to expect that capital-output ratios will increase to the degree that the economy advances toward industries having greater capitalization. III. The majority of economic development theories owe their origin to concern with the analysis of problems or conditions ex isting in developed countries. Therefore, when they are applied to countries of scant development, it is necessary to take a series of factors into account. In the first place, the concept of development is relative, which suggests the existence of inequalities and contrasts 14

Colin Clark. Conditions of Economic Progress, 2nd edition. London, McMillan. 1951, Chapter XL

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between countries -—inequalities that ordinarily cannot be explained exclusively in terms of economic factors susceptible of isolation by the expedient of formulating some simple hypothesis. The process of economic development is conditioned by the basic structure of the society: hence, a development theory that is applicable to the less-developed countries should take into consideration not only the generally-accepted ingredients of economics but also the physical and cultural surroundings, political and legal structure, methods of education, existing incentives, willingness to accept or reject the change brought on by development (as reflected in attitudes to ward science, the accumulation of wealth, and risks), etc. These factors do not operate in the same way in every economy and cannot be considered independent variables of the problem. In the second place, when these considerations are examined in the light of the cumulative nature of the process, the problem of attaining the maximum harmony of growth consistent with the needs of so ciety takes on rather different shades of emphasis in those coun tries. In his excellent discussion of this subject in the book, “Rich Lands and Poor”,15 Gunnar Myrdal suggests that much could be accomplished toward the formulation of an acceptable theory of economic development if economists’ attention were centered on the problem of why inequalities and contrasts arise between countries and regions and how they tend to perpetuate themselves. He con cedes that these circumstances do not lend themselves to facile ex planation in terms of the traditional theoretical approach character ized by abstraction based on simple hypothesis. In its place he suggests a theory of social change —since the process of economic development cannot be isolated from the remaining social proces ses—using as its point of departure the idea of the vicious circle that many have used to explain why a poor country does not over come its poverty. However, he outlines this concept in a positive manner. Giving it the name of “circular causation”, he demon strates how all the social ingredients enter into play rather than the economic ones alone. Myrdal supports the conception of relative equilibrium that we already encountered in Harrod and Domar, arguing that the notion of stable equilibrium which characterizes the traditional analysis of the growth problem is not valid since the return-toequilibrium tendency predicated by that analysis does not occur in reality. On the contrary, he says, any force which propels the sys tem in a given direction will set new forces in motion which will influence it in the same direction as the original impetus. For this reason, instead of tending to return to its initial state, the system will move farther and farther array. That is to say, any positive is Gunnar Myrdal, Rich Lands and Poor, World Perspectives Series, Vol ume XVI, Harper and Brothers, New York, 1957.

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force which promotes development will he followed by others that will stimulate that development even more, making it cumulativethrough time and space. In other words, as the expansion process gains momentum, its effects are disseminated to other areas through the channels of trade, transportation, communications, etc. How ever, this diffusion is uneven, particularly in the early stages. Dur ing the course of this process, Myrdal points out, forces that tend to counteract or weaken the effect of the forces of expansion also enter into play — with the final result depending on the relative intensity of the two groups. National development policies that are well oriented as to direction and objectives can assist a great deal in accelerating the expansion process and mitigating the in equalities that follow in its wake. A similar theory is outlined for us by Harvey Leibenstein in his book, Economic Backivardness and Economic Growth.1''. This author makes a very interesting application of the Harrod-Domar model to the analysis of economic development in the so-called “backward” areas. He maintains that if these areas are to break the vicious circle in 'which they move, and achieve continuous secular growth in the manner prescribed by Domar and Harrod, it is necessary that the initial development stimulus or stimuli be of a given minimum magnitude. The situation of those countries, he maintains, is characterized by a series of variables (per capita income, savings, capital formation, level of education, etc.) that have a certain stability at very low levels. Although these econ omies are subject to certain stimuli, the latter are too weak to have the desired effect: i. e.. they are below the minimum level required to give the necessary impetus to the so-called "growth agents”: employers, investors, savers, etc. In other words, in order for development to be initiated and continue uninterruptedly, cer tain favorable conditions must be present — something which could not be achieved if the stimuli are too weak. However, the fact that the greater part of those stimuli have a cost dimension gives rise to another problem: Given the scant resources available to those economies, how and where should the stimuli be applied in order that they may produce a balanced development? Thus we see that everything cannot be dene at once, but in many cases the stimuli must be given a time dimension. In other words, it is necessary to determine how best to finance those stimuli through time in order to promote the greatest possible balanced develop ment. Thus in some cases it is much more desirable to allocate expenditures to a given stimulus over a certain period of time rather than all at once. Liebenstein recognized that it is no easy mat ter to determine the cost and time dimension which should be 10 Harvey Leibenstein, Economic Backwardness and Economic Growth, John Wiley & Sons, Inc., New York, 1957.

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given the growth stimuli, because of the differences between cer tain economies and others and the dissimilar nature of the .various stimuli. However, he points out that in the first stages of develop ment the required magnitude is greater than in subsequent ones because of the cumulative nature of the development process. In the early stages, for example, there is less opportunity for realiz ing internal and external economies, owing to the high degree of indivisibility and immobility of productive resources and the fact that the new projects do not become immediately profitable. The foregoing circumstance is also traceable to the negative aspects of development — cultural barriers, reluctance to assume entre preneur-type risks, low level of education, etc. — which are stronger at the beginning. Liebenslein tells us, for example, that the net investment required to lend impetus to development is greater in the initial stages. By the same token, however, the contribution of net investment to an increase in per capita income is greater, because the capital-output ratios follow an upward trend in the measure that the economy progresses from primary industries of low capitalization to those having a higher capitalization. The last decade has witnessed an increase in endeavors such as the foregoing to offer a theoretical explanation of the growth problem in the so-called underdeveloped countries. In the majority of these cases, theories previously formulated with respect to more developed areas serve as the point of departure. Il is to be ex pected that in the measure that concern for, and study of, the particular problems presented by these areas come into clearer fo cus, a new theoretical orientation of the development phenomenon will emerge that will be more realistic and hence of greater utility for development planners in the countries involved. IV. In summary, we may say that the theoretical treatment given the problem consists of two different (and inadequate) ap proaches — treatises that are too general or models that are over simplified. Because the general treatises are lacking in theoretical analysis, their use value is restricted. For their part, the sim plified models aim al being too exact, and thus their application is limited. The two approaches can be compared to the two ends of a bridge which, if eventually completed, can one day give us an acceptable theory of economic growth. While this theory is being formulated, those charged with guiding and promoting de velopment may choose one end or other of the bridge as their point of departure. Whatever their choice, however, they should thoroughly understand the problem in its setting and be fully cognizant of the limitations of the method they plan to use.

ECONOMIC PLANNING SEMINAR

October 27 — November 28. 1958

THE UTILITY OF ECONOMIC AND SOCIAL PROJECTIONS IN ECONOMIC, SOCLAL, AND PHYSICAL PLANNING By

Alvin Mayne

Director

Bureau of Economics and Statistics Planning Board of Puerto Rico

THE UTILITY OF ECONOMIC AND SOCIAL PROJECTIONS IN ECONOMIC, SOCIAL, AND PHYSICAL PLANNING By

Alvin Mayne Director

Bureau of Economics and Statistics Planning Board of Puerto Rico

Economic planning accomplishes four basic functions: evalua tion of potentialities, conversion of objectives into programs and performance, establishment of bases for choosing between the vari ous programs in the light of limited resources, and finally, pro gram coordination. Today I should like to point out the ways in which economic and social projections permit these four functions to be carried out; I will also discuss the utility of such forecasts in the realization of rational social and physical planning. The Need to Evaluate the Future Generally speaking, every decision implies an action to be put in practice on some future occasion. Seldom do the action and decision take place simultaneously; however, the time lapse be tween the decision and the action varies. For example, the act of standing up or sitting down follows almost simultaneously on the decision to do so. Action taken by the government, particular ly with respect to the utilization of financial, natural and human resources, ordinarily covers periods ranging from weeks to decades. remembering here that not only is the future execution of a given decision involved, but the impact ■which that action will in turn originate. Therefore, if governmental decisions are to be founded on a solid base, it is necessary to forecast the future. This will enable the government to formulate policy on official programs and actions which will affect the changing structure of society and the economy. In order to make decisions, therefore, it is necessary to have a frame of reference which treats of the future. This outline should be an expression of the future economic and social scene. Basic Approach to the Model It is important to come to a decision as soon as possible as to the nature of the future scene to be projected for purposes of

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decision-making. There are two basic approaches for use in con structing economic and social models and for projections. One method is to outline the state of affairs ■which is desired for the future, without much regard for feasibility —• i. e., for the actual possibilities of realization of a given economic and social model. This approach rests on the. belief that through economic and other forms of planning it is possible to achieve the majority of the desired objectives. The procedure calls for, and seeks to find, a series of incentives and programs that would lead to attainment of the desired goal. The second method does not begin with a picture of the final result a priori, but analyzes the changes that have been occurring and estimates the growth potential. The incentive programs are then molded to adjust to present and prospective circumstances and are used to promote the developments that are considered the most desirable. If the social and economic projections reveal undesir able trends, the next step is to determine what forces will be needed to alter the course as foreseen. Once these forces are identified they can be channelized toward programs that will promote the progress of the economy. The weakness of the first method lies in the fact that in order to be implemented it requires more authority than a government ordinarily possesses. It also tends to generate excessive claims on the scant resources available. The result may be a poor distribu tion of such scarce resources to the extent of causing inefficiencies and loss in productivity. Further, confusion is apt to arise if the desired goals are accepted as projections and fail to materialize. Decisions in this case would have been made on the basis of fic titious possibilities. The second method has a better chance for success because it is based on forces and potentialities that already are on the rvay or that show promise of developing. Therefore, the government’s responsibility consists of providing the framework that will per mit the desired growth to occur. Taking into consideration human limitations in comprehending the nature of the forces at work, feasible rates of growth are inserted into the model in advance. The danger in using this method is that it is very conservative and tends to overemphasize past rates of growth. In my opinion, economic planners can provide the necessary assistance to supervisors and colleagues concerned with government program planning if the future they foresee is based on the second method: that is, a projection of the changes that are the most like ly to occur. Projections of the future economic and social scene should be related to the period of time during which the decision-produced action and impact will occur. This will vary according to the decision involved and the corresponding effects on the use of re

THE UTILITY OF ECONOMIC AND SOCIAL PROJECTIONS

sources and the structure of the society and economy. For example, if the problem consists in estimating income with a view to pre paring the government budget for the coming year, the projection should take into account only those financial resources that the government will have available during that year. On the other hand, if fiscal and tax policies which seek to change the income pattern are involved, it is necessary to explore future legislation in greater detail, particularly if the intended modification is to be produced by means of legislative action. Since it is usually dif ficult to change laws at short term, the projections must be ex tended still further. When dealing with human resources one finds that the required projections cover 25 years or a generation, for it is impossible to exert sufficient influence on the educational level of the labor force in any less time. In practice, the length of time for which a projection is made will have to depend on the amount of time needed for the corresponding decision to be fully executed. Care should be taken to limit the use of long-term projec tions as much as possible. A very useful practice is to make a conscientious analysis of the end use of projections of the various individual statistical series for different periods of time. Vi hen determining w'hat series should be projected and for what periods. the person doing the projecting should carefully review the nature of the decisions to be taken on the basis of the projections, as well as their probable impact. The very process of analyzing the series to be projected and determining the suitable time period will give him an opportunity to acquire a better understanding of the deci sion-making process in government. Scope of Projections Projections not only involve varying lengths of time but also certain phases of social and economic activity. It is better to begin with the nucleus of the more or less universal socio economic indices and to branch out from there, rather than trying to cover all sectors of the economy in a huge model. The fundamental data for carrying out the forecasts may not be available, and the prep aration of more elaborate projections may be seriously affected by the quality and utility of the central nucleus. Therefore, the scope of the different sectors of the economy and of the societv included in the model will depend largely on the final use for which the projections arc intended. Once the projections prove their usefulness for social, economic and physical planning, thev will be in greater demand by the agencies entrusted with the plan ning function, and requests will be received for more detailed estimates. For example, personnel charged w ith regional and phys ical planning will soon call for the preparation of projections for smaller areas, and, in consequence, the model requirements will

•16

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be broadened. Expanding the model requires a considerable body of statistical data and greater knowledge of the interrelations be tween the different geographical areas, and of the attitudes of the population with respect to mobility. Economic Planning and Projections On focusing attention on the relationship between economic planning and projections, we define economic planning as the phase which deals in greater or lesser degree with government programs and social activities evaluated in money terms. This does not imply that economic planning is completely independent of social and physical planning, since the achievement of economic goals de pends in large measure on social and physical forces. In turn, the ability to fulfill the requirements of social and physical planning necessitates the use of economic and monetary instruments. Even though the forces are very closely related — to the extent that it is impossible to draw a fixed line between them — I will deal with them separately here. Social Projection as a Frame oj Reference For a better understanding of the role played by socio-eco nomic projections with respect to planning the economy, let us ex amine briefly analogous situations that might arise in military experience. During a war the General Staff is responsible for the development of the general plan of strategy. For example, in the Second World War the United States and its allies fought on two different fronts. The United States was faced with the alternative of fighting simultaneously on both fronts or remaining passive on one while launching an offensive on the other. The strategy chosen was to emphasize the battle in the European theater of war. This decision was based on a series of estimates that did not require an elaborate calculation. Perhaps the situation of the Allies was taken into consideration, together with the preliminary estimates regarding the speed of equipment production and man power re cruitment and training, as well as the supply of transport ships. On the basis of these estimates the reinforcement of the troops was planned for many years. The troop potential defined the na ture of the organizations that had to be developed, and the con centration of troops in various places gave a quantitative estimate of the strategic decisions of the high command. The projections of strategy with respect to troop deployment and reinforcement became the frame of reference for estimating the resources needed. It served as the basis for guiding the efforts of the different government agencies in the production and distribu tion of military supplies and made it possible to translate the vol ume and concentration of troops into terms of needs of the agents of production as well as those that otherwise supply demand. The important thing was that each agency was using the same basis

THE UTILITY OF ECONOMIC AND SOCIAL PROJECTIONS 17

for estimating its needs. Further, if the supplying agency found that it could not satisfy the demand derived from the projections on troop strength, the General Staff was informed that the original projection was unfeasible. Economic and social projections are in a sense equivalent to the prediction of troop strength and the plan of action followed by the General Staff in winning the war. The first set of economic projections may not be based on detailed and elaborate studies, but they nonetheless do fulfill the function of determining in gen eral terms the strategy' to be followed in attaining certain goals and objectives set by the government. Puerto Rico’s experience demonstrates that the central body of strategic projections should cover population estimates and an ticipated economic changes by' ty'pe of industry, preferably expres sed in statistical terms, such as net income, the labor force, pro ductivity, and employment. In Puerto Rico we have extended these projections to 1957 and have published a volume entitled “Proy'ecciones del Desarrollo Económico de Puerto Rico" (Economic Development Projections jor Puerto Rico). The method used in making these estiinates is the topic for discussion in the next lecture. Conversion oj Objectives into Programs and Action Once in possession of the central economic and demographic frame of reference one can proceed to work on the implications of these projections with respect to the various programs which the government must carry out. I have termed this phase of the work “impact studies”. In a certain sense these studies constitute the core of the present economic planning Seminar. These impact studies involve an investigation of the program in terms of avail able resources and the action the government should take in order to increase them. Transportation, electric power and industrial de velopment programs also figure in the performance schedules that make use of the economic and demographic frame of reference as a guide for action. The impact studies begin with an examination of the future and of the changes which may take place in the socio-economic structure. Let me explain briefly' how economic and social projections permit the various functional agencies to develop their programs. Taki ng man power as its point of departure, the study’ of economic projections made by the Planning Board indicates that productivi ty per man-year in 1975 will be relatively equal to that existing in the United States in 1955. Using this productivity’ projection in conjuction with an estimate of the number of employees (which could then be determined on the basis of the previous projections of the composition of the Puerto Rican economy in 1975). it was possible to arrive at conclusions regarding the educational level

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and the necessary type of occupations called for if Puerto Rico is to achieve the rale of growth that the economic projections show to be feasible. This point will be discussed in greater detail in the lectures on the projections of human resources. Recent economic projections have been used to determine the amount of the different types of cargo that Puerto Rico will im port and export. The economic projections used in this case were those dealing with 1975 anticipations of family income, the con sumption of foodstuffs and clothing, etc. Projections of the dif ferences between the physical bulk of merchandise such as wheat, rice, sugar and cement, and the types of goods called for by the available cargo space were also included. Thus the central nucleus of projections was extended to cover the special needs of port plan ning. The point which must be brought home is that, once having obtained the general economic projections relating to population, number of families, and level of income, it is possible to branch out into a variety of areas. In one case, for example, we proceeded to the consideration of education by using productivity measure ments. In other instances, particularly with respect to port facili ties, we were guided by family income levels. Another impact study has to do with future internal transportation facilities that economic development will demand. Here again the yardstick of family income, when related to the possession of automobiles, plays an important role in determining Puerto Rico’s future need for highways. Electric power needs bear a close relationship to the rate of expansion of income and pro gress in industrialization, with particular reference to development by type of industry. (In the present Seminar the relation between economic growth and the demand for electric power not only consti tutes a lecture topic but a problem for consideration by a special working group.) Economic projections formed the basis for a study regarding the economic value of nuclear energy: On the basis of the previously-constructed economic and demographic pro jections it was possible to conclude that the rale of expansion and the need for electric power in Puerto Rico will be such that the introduction of efficient-size nuclear units will be feasible. By calculating future family income it is possible to ascertain the number of eventual beneficiaries of social security. Housing needs also can be estimated by projecting the distribution of family income into the future. Industrial development requirements, in terms of the capital necessary to achieve full industrialization by 1975, can be determined by resort to economic projections. An estimate of the capital funds which the government will need in order to support the economic development program also can be formulated by analyzing the participation of the private and public sectors.

THE UTILITY OF ECONOMIC AND SOCIAL PROJECTIONS 19

In turn, all these impact studies permit us to refine the original projections. A careful examination of the graphs and informa tion obtained in the different economic projections leads to certain conclusions regarding the future structure of the economy and the different government programs. For example, an analysis of the agricultural resources of Puerto Rico in relation to the potential market reveals that the opportunity for expanding total net income generated by agriculture is relatively small. It also shows us that unless a way is found to reduce the number of employees and other persons who depend on agriculture, there will be a huge discrepancy in levels of income. Thus, looking toward the future by means of these economic projections one understands that the problem of agricultural development rests on an endeavor to promote programs that will yield an increase in income per worker so that income differences between the urban and rural populations will not become more pronounced. Distribution oj Resources As you will see during the course of these five weeks, official efforts aimed at the optimum distribution of financial resources of the government need to make use of centralized projections of eco nomic and industrial development and at the same time ascertain their impact on the various government programs. Once these estimates are synthesized, the result is a program of action for socio-economic development that should be executed through the government budget. As is to be expected, available financial re sources will not necessarily provide coverage for total needs, mak ing it impossible at this stage to make pertinent decisions on the different programs. Here development projections can perform a further function of providing the bases for determining what financial resources the government will have available for achieving pre determined goals. If consumption trends can be predicted for certain types of articles, and if the income of certain groups is known (for example, corporate and individual earnings) it then becomes pos sible to predict the level of government revenue under the existing system of taxation. Government fees such as those charged for automobile licenses, etc., can also be projected into the future. In summary, then, we may say that the economic and demographic projections form the basis for estimating the financial resources which will be available to the government through taxation. Taking into account probable changes in revenue as reflected in the forecast of income from taxes, it will be possible to determine the ability to obtain credits, locally as well as abroad. The legal criterion is decidedly one of the most important in designating the masnitude of the public debt. If there is no legal limitation, official borrow ing will be conditioned only by the nation’s capacity to amortize the debt. It is feasible to estimate the government’s borrowing capacity

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if it can be demonstrated that interests on the debt will remain at a reasonable level in relation to anticipated tax income. Ways can be found to alter revenue sources by changing the tax structure or through other techniques, and the probable consequences of such changes can be weighed. The coordination of financial resources with government program needs supplies the basic guide for use in distributing those resources and revising the bases of taxation. Studies on the implications of the proposed programs at varying levels of financ ing will make it possible to accomplish a more efficient distribu tion of available resources among the different programs. These impact studies proceed from the field of general forecasting to the phase of evaluating program costs. In this way they provide a more complete picture of the effects that may be anticipated from the alternatives in the distribution of resources. The problem of distributing financial resources among indi vidual government programs should be examined in the light of their respective aims. Apart from strictly economic considerations, social and physical goals must also be considered. In order to effect a reasonable distribution of resources among the different programs a firm criterion must be established in advance to guide the official choice between the various social, economic and physical objectives. (Dur ing a later lecture we will lake up existing social and economic problems.) In the extremely difficult problem of distribution of resources the Chief Executive plays a very important role: He is empowered to emphasize certain goals or programs and thus determine which sectors of society will be benefitted by govern ment programs and which geographical areas are to receive official aid. Coordination

Having effected the distribution of resources, a physical as well as social and economic development plan is obtained. You will observe that the foregoing analysis has not been in terms of specific projects but rather the implications of economic and demographic forecasts. Contrary to the usual budgetary methods, the planning techniques discussed in this Seminar originate in a central framework which traces economic trends as well as the social. economic and physical objectives that arc considered both desirable and feasible. Under this system the distribution of resources is made during the first stages of the budgetary process instead of at the end. as is customary in almost all governments. The danger of the last-mentioned method is that rather than being based on total social, physical and economic needs, the final distribution of resources often rests on the influence of certain ministers and the appeals received by the budget planner, particularly from the Chief

THE UTILITY OF ECONOMIC AND SOCIAL PROJECTIONS 51

Executive, assisted or counselled by the Budget Director. It irecommended that once a development program is established, all of the agencies involved be notified of the maximum appropria tions available to them for carrying out their various programs and projects. In general outline they should be given guidance with respect to the nature of the objectives they are to pursue. The agency directors or ministers responsible for executing the various assignments should formulate specific projects which will enable them to develop their over-all programs. Thereafter these projects should he reviewed by an economic planning agency and by central government officials to assist in coordinating the program- anil to assure that the assigned objectives are being pursued in fact. This review will not be the ordinary type of budgetary review because the distribution of financial resources among existing programs will have already been effected. The process sequence is outlined in the flow chart shown below. Physical Planning The assistance afforded by economic and demographic projec tions is not limited to the field of economic planning nor to the scheduling and distribution of financial resources among the various programs. Such projections can be of great help in the develop ment of certain programs in particular if the projections themselves are made with that end in view. We are becoming increasingly aware of the need Io carry demographic and economic projec tions beyond the general framework to a regional plan that is compatible with the former. During the past year we have begun to break down general projections for the island into estimates for individual regions and municipalities. In this way we have arrived at conclusions with respect to the commercial growth of the different areas. Thus we hope to provide the essential in dicators that will make it possible to determine the priority that should be granted to certain physical development programs such as highway construction, water mains, electrical energy, localiza tion, etc., in order to utilize available resources more efficiently. In Puerto Rico there are three principal cities and seventy seven municipalities. Everything appears to indicate that the island's development will be centered around the three metropolitan areas, making it extremely important to determine the growth potential of each. This will present a problem for the planner unless he has previous knowledge of the economic phases of growth. There is a certain belief that the government has only to construct a port or a great highway to assure development of a given citv or area. Not so: There are cases where ample highways have been constructed, or ports have been developed, and the citv remains lifeless. In consequence, various factors should be taken into consideration when making projections for specific areas. It is

O1 tn

PROCEEDINGS ECONOMIC PLANNING SEMINAR Development of Series

of Economic Statistics

V Projections of Trends of Socio-Economic Forces

------ >

Impact Studies Agriculture Transportation

Education and Human Resources Social Problems

Industrial Complex Consumer Demand

Regional Development

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Over-All Distribution of Financial Resources and Development Programs

Breakdown of Projections of the Trends of Socio-Economic Forces

THE UTILITY OF ECONOMIC AND SOCIAL PROJECTIONS 53 necessary to determine which elements can he expected to have the most far-reaching effects. As you will see in some of the forthcoming lectures, the City of San Juan progressed more than other areas due to the encouragement given it by economic develop ment. However, today there are indications of the development of a second center of activity, in response primarily to the construction of large factories. Projections of the rate of growth of the different areas would be of great value in determining the priorities to be given to highways, conduits and sewage systems, and water resource programs. Further predictions for given areas of the economy related in turn to the total development of the island, can serve to guide the execution of certain projects planned for a specific area: An example would be the construction of a highway to join centers of commercial activity. Urban planning can also use physical and economic projections to good advantage. For example, if we know some thing about personal income, we can make deductions as to the number of automobiles. The experience of the United States and other countries indicates that the purchase of automobiles is an important phenomenon in determining the characteristics of urban growth. The automobile permits people to reside in the suburbs of the city instead of living at points where walking is convenient and where public transportation services are at their disposal. Entire residential areas have been created that have the automobile as their sole means of transportation. Another result has been the advent of shopping centers, etc., to serve the needs of these com munities. Once an idea is had of the number of autos, physical planners can estimate the probable rates of increase in urban zones and the future need for one-, two-, or ten-story houses. Social Planning

In the social field, which in some degree may fall outside the scope of government programs, economic and demographic forecasts make it possible to ascertain needs and pressures. For example, one of the major consequences of industrialization is the growth of urban zones at the expense of rural areas. Here in Puerto Rico this will occur in the course of economic progress due to the probable contraction in agricultural activity. Moreover, we can predict with a degree -of certainty that urban centers will continue to grow, unless the government lakes action — which m turn could retard economic development. This population move ment gives rise to social problems such as internal migration, the creation of suburbs in urban zones, and the possible breaking up of families and dismemberment of the united communities where mutual aid has been so vital a factor in alleviating low standards of living. The danger that crime will increase as a consequence of urban unemployment in contrast to rural unemployment, the weakening of the family structure, etc., exemplify the social prob

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lems that may be expected to arise from industrialization and urbanization. Projections will give us some measure of the magnitude of these problems. General Problems Revealed by Projections The change in the structure of the economy and in the utiliza tion of man power in the labor force reveals problems that would not be perceived in time to take corrective action unless forecasts of the probable economic development were available. In Puerto Rico, for example, despite the rapid growth in levels of income and the continuous migratory movement to the United States -which has tended to counteract the natural growth of the population, un employment has remained at a level of from 13% to 15% of the labor force. Unless we carefully analyze the changes foreseen in the economic structure of Puerto Rico, one might assume that unemployment represents an instance of failure in the economic development program. However, if we trace the sources of employ ment by sector and then project potential employment in the light of the experience obtained from various impact studies, we will discover that the unemployment problem is in large measure the result of structural changes in the economy consisting of a transi tion from lower-to higher-paid levels of employment. We further come to the realization that this chronic situation will continue for many years. Instead of indicating slow growth, this situation to a certain extent attests to rapid economic development. Hence programs designed to lessen the burden created by unemployment become a part of the economic development responsibilities of the government. Projections are useful in the analysis of many problems. For example, they have shed a great deal of light on the rate at which wages should be increased. The use of projections can partially reveal the nature of the school curriculum that will be required by future development. The type of credit institutions which the government should sponsor can be ascertained by analyzing the various forecasts. To guide their investment decisions, many private firms in the fields of construction, production, and market ing must have a clear picture of anticipated changes. Summary We have tried to show how projections and plans can form the basis for social, economic and physical planning. In fact, the operations described in this paper, particularly as regards the crea tion of a development plan and the functions of the budget, constitute an outline of the topics to be discussed in the Seminar during the coming five weeks. These talks will take up in more detail the way in which we progress from general demographic and economic projections to development programs and from there to specific projections.

THE UTILITY OF ECONOMIC AND SOCIAL PROJECTIONS 55 Economic projeclions also facilitate a Letter understanding of the problems which arise as a consequence of the changes in the socio-economic structure. Further, they equip the government to meet anticipated needs or to change the laws under which the economy and society function.

ECONOMIC PLANNING SEMINAR

October 27 — November 28, 1958

ECONOMIC DEVELOPMENT PROJECTIONS FOR PUERTO RICO By

Dr. Miguel Echenique Bureau of Economics and Statistics Planning Board of Puerto Rico

Lecture prepared for the Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

ECONOMIC DEVELOPMENT PROJECTIONS FOR

PUERTO RICO By

Dr. Miguel Echenique Bureau of Economics and Statistics Planning Board of Puerto Rico This morning Mr. Mayne explained the function performed by economic development projections in the general planning of eco nomic development. I shall not elaborate on this discussion but will proceed directly to an explanation of the way in which such projections have been made for Puerto Rico. By way of introduction I should like to refer briefly to the first projections of this type made in Puerto Rico. In 19-19-50 the Planning Board prepared what we might call the first general plan for economic development. Very probably you have had occasion to read something about that study. At that time, full employment was still regarded as the maximum objective of economic develop ment, and the projections tended to show a rale of growth which in a decade or so could lead to a situation of full employment. The anticipated growth in production, of course, was very great. Here one should remember that the growth of the Puerto Rican economy in the years prior to 1949-50, particularly beginning with 1947, was extraordinarily rapid. More important, it had been induced by truly internal economic factors. I should say that the most valuable experience derived from these projections had to do with levels of occupation or employ ment. The conclusion drawn therefrom is that it is much easier to increase production than to augment the level of productive oc cupations. According to the projections agricultural employment was expected to remain more or less constant in the following five or ten years. Now, at the end of eight years, we find that a substantial decline has occurred. It is easy at this juncture, of course, to explain that decrease. Keep in mind, however, that back in 1949-50 the Puerto Rican economy had not entered the socio-economic transformation that has characterized the present decade. Moreover, we understand that ours is not the only case in which this particular development was not anticipated: Vie have news of other national plans in which production forecasts turn

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out to be much more accurate than the predicted level of employ ment. and we believe that the same error is bound to occur again. What happened in Puerto Rico’s case was that scarcely had the genuine economic development process begun when the farm popu lation began to break away from traditional modes of life, abandon ing secularly inhabited areas in a constant stream of rural exodus. What had not happened in centuries took place in a few short years. A similar occurrence was witnessed in the case of other in dustries characterized by low productivity. Take, for example, the drastic decline in needlework in the home which eight years ago provided employment for more than 50,000 women. Today a scant 12,000 are engaged in that type of work. One might say that the principal event in economic development in the last few years has been in the case of industries ■which initially have scant productivity and low salaries. These tend to disappear if they are not susceptible of technical innovations. If such innovations are feasible, they ordinarily are accomplished. In either case, the net result is a decline in the level of employment. Therefore, the experience of our past projections led to the conclusion that it was necessary to adopt a system of projections that would more explicitly demonstrate the evolution of employ ment. This required a variation in the type of projections em ployed: Instead of merely projecting total gross product, for ex ample, it was necessary to estimate production for each of the various sectors of the economy. Thereafter, a more detailed picture of the employment situation could be obtained by analyzing the respective levels of productivity. For this reason, our most recent projections include production by sectors as well as productivity and employment. Projection Techniques To begin with, I should like to outline a method — or rather than “method” I should say “artifice” — which we have employed quite frequently in projections in Puerto Rico. It rests on the empirically proven fact that, provided income levels are approx imately the same, economic variables tend to follow similar patterns of evolution in countries that do not differ greatly in a cultural and institutional sense. Naturally, where economic variables depend on habits of consumption, this principle simply reflects the fact that the distribution of expenditures, given like income, is similar in the different countries. In the case of Puerto Rico, for obvious reasons, such a similarity shows up most frequently when a comparison is made with the United States. In point of fact, the trends of the past few years clearly support the validity of our basic claim, insofar as the distribution of consumption ex penditures is concerned and in many other respects as well: urban concentration, composition of the economy, proportion of econ

ECONOMIC DEVELOPMENT PROJECTIONS

omically-active population, etc. Economic projections indicate that in 1975 the relative level of income in Puerto Hico will be similar to that of the United States in 1950. In terms of the foregoing principle, data on the economy of the United States in 1950 become an important source of information for purposes of 1975 projec tions for Puerto Rico. Naturally, the field of application is limited by the special characteristics of each country; nevertheless, in Puerto Rico’s case we have found the principle of enormous practical utility and susceptible of reasonable application in an infinite num ber- of cases. Let us observe some examples: On predicting the economic structure of Puerto Rico for 1975 we have to project, among other things, the volume of employment, production, and produc tion by employee in the domestic service sector. Vi e can resort to historic data, of course, which indicates trends that clearly point to a drastic reduction in employment of this type in recent years. Is it logical that such trends will continue? Vi hat level of employment in this sector would be compatible with an average family income almost three times the present one? In reality, we cannot look either to historic data or to an analysis of family budgets for a reasonable answer. By observing the economy of the United Stales, in which family income is analogous to that forecast for Puerto Rico in 1975, it is possible to get an idea of the volume of domestic employment which coexists with other oc cupations in a high-income economy, and of the rale of remunera tion for domestic work in comparison with the rest of that economy. Hence, the proportions existing in the United States were taken as points of reference when preparing the projections for Puerto Rico. Always keeping in mind the particular characteristics of the country involved, many other examples in which the applica tion of this procedure is justified could be cited. 1 he first phase in the process of formulating the projections was to estimate certain macroeconomic variables — the first, gross national product. Gross product is considered to be made up of the sum of private gross product and governmental gross product. I he latter is defined as the equivalent of net income derived from activities of the government of the Commonwealth, govern ments of the municipalities, and the federal government. It is there fore equivalent to salaries and wages paid by these three sectors. Private gross product is computed as the difference between total gross product and governmental gross product. When projecting the federal government gross product we proceeded on the assumption that the volume of salaries paid to civilian and military personnel will remain constant. It has not been considered necessary to carry this part of the analysis any further since federal government expenditures in Puerto Rico — military for the most part — respond solely to decisions of the

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federal government and thus are independent of the Puerto Rican economy. Since the product of the government of Puerto Rico is con sidered dependent at long term on the total gross product, the corresponding projection was guided by that relationship of de pendence. The first step with respect to gross private product was to examine past trends, as is customary in the case of projections of this type. However, rather than representing an extension of the past trend as such, the projection of the private gross product reflects the growth which is currently considered not only possible, but very probable. The rate of growth projected amounts to 7% annually. At first glance this anticipated rate of growth might appear to be unduly high. In actual fact, the growth of the private gross product in Puerto Rico in the past decade has been more or less on the order of that projected for the future. The important thing, of course, is whether or not it will be possible to achieve that growth from this time forward. To appreciate what this really involves, we need to know how much the remaining sectors of the economy will have to grow. At this point we can affirm, a priory, that manufacturing is the most important autonomous sector. Later it will be seen how the accomplishments forecast for the industrial development plan include the increase which will have to take place in manufacturing if we are to meet the growth goal set for gross private product. The principal reason for formulating the projection of total gross product in the three parts mentioned is that gross private product is isolated, thus facilitating the task of estimating invest ments. As will he pointed out later, there is a close relationship between investment in plant and equipment and gross private product. On the basis of these three projections the annual rate of growth of the total gross product amounts to approximately 6.3%. For the period 1947-1955 the rate of growth of the total gross product as constant prices amounted to approximately 6%. Thus the projected growth is no greater than that which has already taken place in the last decade in Puerto Rico. The second step was to determine another aggregate figure: net national income. Because social account statistics in Puerto Rico (as well as in many other countries) do not show real produc tion by sectors but only net income (or production at factor cost), it is necessary to obtain first the total aggregate of net or national income in order to proceed then to the required breakdown by sectors. We are familiar with the customary relationship between net national income and gross national product. We know that net or national income is equal to gross product minus depreciation

ECONOMIC DEVELOPMENT PROJECTIONS

or amortization, indirect taxes and business transfer payments and subsidies. In the estimate of net income, beginning with gross product, the foregoing items were duly computed. When estimating depreciation, account was taken of the rela tionship existing between it and total net income. We found, for example, that depreciation in Puerto Rico in 1955 represented 6.9% of the total net income. However, in the United States this percentage is somewhat higher, having amounted to 7.5% in 1950. This is understandable since there is proportionately more capital in the United States and the rate of depreciation is likewise greater. It is nonetheless fairly reasonable to suppose that our percentage of depreciation will be similar in 1975 to the present one in the United States, particularly since the secular trend in Puerto Rico definitely points to a move in that direction. Depreciation for 1975 was therefore estimated at 7.5% of total net income, and a simple linear interpolation was effected for the intervening years. These depreciation funds are undergoing a tremendous increase in Puerto Rico and in the future are expected to represent a very important source of financing of total gross investment. The procedure was similar with respect to indirect imposts, consisting largely of excise and sales taxes. At present the pro portion of these indirect taxes to net income in Puerto Rico is approximately 12.4%. This ratio is quite similar to that existing in the United States in 1955. Since historic data of Puerto Rico as well as that of the United States indicate that there is no clear trend toward variation, it was assumed that this percentage will remain more or less constant. Something similar occurs in the case of business transfers. For 1975 the same percentage prevail ing in 1955 was taken: i.e., 6.6%. In the case of subsidies (which, as we have pointed out, are not included in gross product but should figure in net income since they ultimately form a part of profit estimates) the estimative process was substantially' different than that followed with respect to the other items mentioned above. Federal government payments to sugar cane producers make up most of the subsidy grants in Puerto Rico. This ty'pe of subsidy naturally bears a close relationship to the prospective production of sugar cane. Basing the estimate on anticipated cane production the figure for 1975 was calculated at some S27 million dollars compared to $20 million in 1955. Once total gross product and total net income are pro jected it becomes necessary to study the growth of the different sectors of the economy. Since the income to be derived from the federal and Commonwealth governments had already' been projected, our next step was to project the net income originating in the other sectors of the economy: manufacturing, agriculture, construc tion and all the remaining service sectors.

64.

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Projection oj Net. Maiiujacturing Income: Net manufacturing income projections were made without studying demand for manufactured goods. To anyone not familiar with Puerto Rico’s economic situation and its relations with other countries it may be surprising that we speak of sueh and such a rate of growth in manufacturing without previously making any mention at all of the economic possibility for such growth: namely, effective de mand. Puerto Rico lies within the customs area of the United States and therefore enjoys an unlimited potential market for its manufactured products. It would not be sensible in Puerto Rico’s case to consider the demand for industrial products as dependent on the growth of the local economy. The current industrializa tion program is based on efforts to promote industries whose suc cess rests in turn on the abundant availability of labor and the incentive provided: tax exemption, leasing of industrial buildings, etc., etc. The great majority of the new factories already estab lished sell their production in that unlimited market in the United Stales. In addition to providing capital and technical knowledge, the foreign industrialist brings the market with him as well — but the market for the specific manufactured product involved. Thus it is safe to say that the synchronization of economic develop ment with effective demand, or, in other words, the condition of balanced growth which economists frequently set as a prerequisite for industrial growth, is not applicable to Puerto Rico. The con cepts of effective demand obviously do apply to the part of the manufacturing industry that is oriented to the local market or which can eventually be so oriented by substituting for imports or pro ducing articles for new domestic consumption. However, at this stage of development local demand is not considered very import ant from the point of view of the country’s industrialization. In accordance with this line of reasoning, then, the projec tions corresponding to net manufacturing income have been ob tained independently, without recourse to specific studies on de mand; and they tend Io reflect the accomplishments that, in the light of past experience and given the present industrialization policy, will probably be forthcoming as a result of direct promo tion. Furthermore, in concrete terms estimated net income from manufacturing is of such magnitude that the rale of increase in total net income projected previously is demonstrated to be fea sible (taking into account increments expected in other sectors) I shotdd mention that although I believe it would not be dif ficult to construct a mathematical model, this was not the case: the method emploved was that of approximations. Net manufactur ing income in 1975 is estimated at Sl.4 billion dollars at 1955 prices, as against S159 million in 1955. This increase implies an average rate of annual growth of approximately 8%. How does this percentage increase compare with past experience? In

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1955-1956 net manufacturing income increased by 16%. In 195657 the growth amounted to 15% despite the considerable decline suffered in the agriculture-based industries, such as sugar refin ing and tobacco stripping. Exclusive of sugar and tobacco proces sing, the manufacturing industry expanded by 23% in 1957 and 21% in 1956. For lhe entire period 1950-1957, the annual rate of increase in net manufacturing income adjusted to reflect the deflationary index of consumption expenditures amounted to 9%. Obviously, then, on the basis of the past upward trend, the pro jected rise does not appear unfeasible. However, one might argue that past rates are not very in dicative: that what is important is whether the projected growth is consistent with lhe expectations of the industrialization pro gram. Let us see: The net manufacturing income predicted for 1975 will require that some 2,500 new factories be in operation by that time. In the light of the past success of the industrial ization program and present outlook, these goals are considered accessible. More than 500 new factories are currently in opera tion, and in a single year (1956-57) approximately 111 new man ufacturing enterprises were promoted. Hence, in keeping with our industrialization experience to dale, attainment of lhe projected levels is considered not only possible but probable, assuming that the industrial promotion endeavor will continue to be supported energetically. Moreover, the goal set for the industrialization pro gram should guide the allocation of government appropriations. Projected net income from manufacturing assumes an increase of 81,280 million dollars at 1955 prices, compared to a total an ticipated increment in net income on the order of 82.250 million. Can lhe difference be produced by the non-manufacturing sectors? In reply I should mention that even though the present explana tion starts with the projection of net income from manufacturing, in practice net income from construction and agriculture were calculated first. Then use was made of a formula constructed on the basis of data on Puerto Rico in which lhe change of total net income shows up as dependent on manufacturing, agricultural. government, and construction industry income, investments in ma chinery and equipment, personal savings, and remittances from abroad. This formula, of course, is not necessary. But in that case lhe projection of net manufacturing income would have had to be postponed until all the. remaining sectors of the economy had been projected, including the service group. Projection oj Net Income ¡rom Agriculture: The projection of agricultural income was based on the study prepared by the Plan ning Board, entitled “Model of Agricultural Development for Puer to Rico,” of which you shall hear more in this Seminar. This. study analyzed the markets for agricultural products and was based on a market-oriented land-use pattern — that is land was theoreti

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cally distributed among the uses calculated to produce the highest economic yield in terms of the market. One might say that the net agricultural income as projected, which presupposes a growth between 1955 and 1975 of slightly more than 8100 million, rep resents almost the maximum possible. This figure is eloquent in the extreme and underscores the emphasis placed on industrial de velopment and on the achievement of this agricultural goal. Since this Seminar will take up agricultural development plans individual ly, I do not believe it necessary to go into further detail on this point. Net Income of the Construction Industry: Net income from construction ivas projected by correlating it with total investment in construction projects. You will have observed that this is the first mention I have made of the projection of investment. For purposes of exposition I felt it advisable to proceed immediately to the discussion of projected net income by sectors. This does not mean, however, that other projections such as the one on in vestments were not formulated beforehand. In effect, net income from construction was determined on the basis of estimated investments, which were broken down into investment in construction and machinery. The factor suggested by the past ratio between net income from construction and the total value of construction activity was applied to the projected value of construction projects. Income Originating in the Derived Sector: We have, finally, the remaining sectors of the economy. In Puerto Hico we have come to call these in combination the “derived sector.” With two exceptions ■— exclusion of government income, which we consider separately, and inclusion of electric power production — the de rived sector coincides with the “tertiary sector” in the classical distribution of the three branches of the economy. Approximate figures were obtained by projecting the over-all figure on the de rived sector in accordance with the formula mentioned earlier and by comparing it with the individual projection made for each of the sectors making up the derived sector. Thus the adjustment was a simple matter. Trade: Commerce is the major source of income in the derived sector. It is easy to trace how this sector has grown in propor tion to net income in Puerto Rico. In 19-16-47, for example, net income originating in the retail trade amounted to approximately 12 percent of net income. In 1955 it continued to be in the neigh borhood of 12 percent. A similar stability has been noted in the United States, where in 1940 net income from the retail trade amounted to 12.1% of the total net income, compared to 12.4% in 1950. In addition to remaining more or less constant, then, the proportions themselves are similar in Puerto Rico and the United States. For this reason the 1975 projection fixes the percentage relationship of net income from retail trade at 11.3% of total net

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income which is the proportion observed in the United States in 1955. Something similar occurs in the case of net income from wholesale activities. The percentage in relation to total net in come has been demonstrated to be stable both in Puerto Rico and the United States, and varied between 5% and 6%. The 5% figure was used in the projection for Puerto Rico. In conclusion, both retail and wholesale commerce arc expected to expand in practical ly the same proportions as total production. Electric Power Industries'. One of the sectors haring the great est growth potential is that of electric power production. Con sequently, net income derived from this sector is likely to out distance all the rest. The projection in this case followed the method of ascribing to net income the same elasticity in relation to electric power production as has existed in the past. Between 1950 and 1955, an increase of 1% in the production of electric power gave rise to an 0.82% increase in the corresponding net income. By assuming that this elasticity will remain constant, the problem was reduced to determining future growth in electric power production. The net income projections were based on estimated demand for electric power, as outlined in special studies conducted earlier. Electric power production estimates are based on an average rate of annual growth from 1955 to 1975 amounting to 15%. Between 1955 and 1958, however, the annual rate of growth was 18%; hence the implied increase in the electric power projec tions for the period 1958 to 1975 is 10% on an average. Converted to figures per inhabitant, this means that from a per capita pro duction of 689 kilowatt/hours in 1957-58 (in 1950 it was only 244), but in 1975 the figure will reach 3,800 kilowatt/hours per in habitant. This projected level of production per inhabitant is sub stantially higher than that existing in the United States in 1950 (some 2,600 kilowatt/hours). The reason lies in part in the fact that the economic development projections for Puerto Rico ascribe a greater relative importance to the manufacturing sector, a heavy consumer of electric power. Hotel Industry. Another of the sectors of the economy hav ing a high growth potential is the hotel industry. In the present projections that industry has been considered within this derived sector. Strictly speaking, however, it belongs within the income originating sector, since it depends fundamentally on external de mand. Special studies regarding the prospective expansion of this industry in Puerto Rico were taken into consideration when pro jecting net income to be derived from this sector. On a conserv ative basis, the figure of 10,000 was arrived at as the number of new hotel rooms that would be provided betwen 1955 and 1975. Four hotels alone will account for 826 new rooms: the Caribe Hil ton, now completed; the San Juan which started operations less than a year ago; and La Concha and El Dorado hotels that are

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scheduled to open next December. In accordance with present statistics it is estimated that an average of 35,000 of net in come is generated by each hotel room. Thus for 1975 a net income of some 855 million from the hotel industry is predicted, as against 85 million in 1955. Services: In Colin Clark’s discussion of the three sectors, it is taken for granted that when the economic level of a country rises, the so-called tertiary sector (composed of activities that pro duce intangible goods — i. e., services) will grow proportionately more than the other two. The principal argument proffered by those who maintain this position is that as income increases, the percentage of family income devoted to expenditures for services also tends to increase. There is a current of thought contrary to the generalization implied by this supposed economic law. In gen eral terms, the new theory holds that the first stages of develop ment in many underdeveloped countries are characterized by con centrations of employment in tertiary occupations having very low productivity; further, that economic progress is accompanied by an exodus from these occupations toward others of higher productivity, after the fashion of agricultural displacement. Therefore, total oc cupation in the tertiary sector will not necessarily grow at a pro portionately faster rate than the other two. In this process of calculating the future evolution of Puerto Rico it is worthwhile at this point to examine the potentialities of the service sector. We must take into account the fact that this sector is singularly important in our case for three reasons: technical knowledge to render such services exists locally, capital is attracted, and demand is local. Furthermore, the capital re quirements for this type of production are relatively smaller than in the case of the production of material goods, implying less pres sure on imports. In other words, the capital-output ratio tends to be greater in these branches of the economy, a significant fact for underdeveloped countries whose investments ordinarily are made up of imported goods to an important extent. The services sector consists of a great number of segments. The projections for Puerto Rico analyze each of the segments com posing our national accounts, which are quite detailed. A brief analysis of certain of these sectors follows: Personal services: The principal groups included under the classification of personal services are shoe repair shops and shoe shine boys, cleaning establishments, beauty parlors and barber shops, funeral homes, and photographic studios. Thus W'e see that they are services rendered for the most part to economic units of con sumption. A high percentage of family expenditures for these ser vices represents earnings from personal labor; thus the proportion of net income generated is quite high in relation to the value of the services rendered.

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An analysis of the growth prospects for personal services of the type mentioned makes it evident that contrary to the theory indicated earlier (to the effect that the consumption of services generally has a high elasticity with respect to total income) in Puerto Rico at any rate this group of services considered as a whole has an elasticity no greater than one. The proof is simple: In the last decade income has undergone a substantial increase but the proportion of expenditures on personal services in relation to total net income has remained constant. In 1946-47 this propor tion amounted to 1.3%, and by 1954-55 it had not changed. A study of the long-term evolution of the United States would appear to support the same conclusion: In 1929 the percentage of family expenditures on these types of services amounted to something like 2.9% of total net income; hy 1955 it had dropped to 1.5%. Family expenditures on personal services amounted to SI2 million in Puer to Rico in 1955. By 1975, applying a constant ratio, they will have reached S40 million. In parallel fashion, the net income gen erated by this sector is projected at S26 million, compared to less than SS million in 1955. Evidently, prospects are not very opti mistic. What is the explanation of the apparent inelasticity in ex penditures for personal services? At first glance and without ex ploring further, one might expect to find inelasticity in the case of certain of the aforementioned services: for example, shoe repair shops and barber shops. By simple observation it can be ascertained that there are no great differences in the use of these services between countries having low incomes and those with high incomes. It does not take much thought to turn up reasons for this circumstance. However, other services, such as dry-cleaning establishments and laundries, seem to flourish much more in economically-advanced countries. As a matter of fact, there is no need to make comparisons between countries, for in a single nation they grow rapidly in the measure that the standard of living rises. We might say that such growth is the counterpart of the phenomenon of the shortage of domestic service which invariably seems to accompany economic development. In the United States in 1950 personal expenditures per inhabitant on paid clothes-cleaning services amounted to some S15, while in Puer to Rico in the same year the figure barely reached 7 centavos. However, by 1955 the latter had increased to S1.60. or almost 23 times as much as in 1950, while in the United States the in crease during the same period amounted to only 8%. The inference here would seem to be that the net income of this particular group should increase substantially and in the same proportions as its monetary receipts. However, in actual fact the greater mechaniza tion of individual firms that normally accompanies their expansion makes the corresponding net income increase in lower proportion

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than sales. One must remember that by definition net income does not include expenses incurred in the purchase of materials, for example, or the monetary value of capital depreciation. As already indicated, the foregoing analysis leads to the con clusion that by 1975 some 326 million in net income will have been generated in Puerto Rico by the personal services sector, representing more than three times the net income currently derived from that source. I have purposely gone into some detail in the case of the personal services sector in order to emphasize the various types of analyses and statistics incorporated in our projection techniques. Medical and allied services: Admittedly the evolution of the composite group of services mentioned above does not seem to respond very well to the type of growth anticipated for the serv ices branch as a whole. However, they unquestionably constitute an exception to the rule. A contrary case in point is the medical services sector, where the outlook for growth is highly encourag ing, and expansion is already evident. In 1950 net income gen erated in Puerto Rico by this sector amounted to some 86 mil lion; by 1957 it had reached 815 million. What is the future outlook? This income derives in the main from family expenses on the services of doctors and hospitals. Constituting effective disbursements, these expenditures undoubtedly have a high income elasticity when the entire economy is taken into account. However, the contrary might be thought when one considers that they belong to the category of goods or services of prime necessity and could hardly be considered luxury items. Keep in mind, however, that what is said to be elastic is not the reception itself of medical and similar services (which in a state of poverty are supplied free of charge by the government), but effective expenditures on these services, for the most part private. Amounting to 815 per capita in 1955, these expenditures are expected to climb to 863 by 1975. The trend toward growth is very strong: In 1940 per capita expenditure amounted to 83.29, which at 1955 prices would be equivalent to some 86. In the United States in 1950 the figure was approximately 855. Throughout all these past years net income derived from the sector of medical and allied services has been equivalent to 38% or 39% of the corresponding personal expenditures. The figure of 38.5% was applied to the case of 1975. Thus by that year the net income derived from this sector is calculated to reach some 850 million, as compared to 815 million in 1956-57 Remaining Services: A more or less similar procedure was followed in formulating the projections for the remaining service sectors, including: (1) domestic service; (2) recreation; (3) commercial services, consisting of advertising, television, and ac

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counting; (4) repair shops; (5) engineering, legal and other professional services; and (6) non-profit institutions. The résumé of the projections for all these sectors appearin the book, “Economic Development Projections for Puerto Ri co,” published by the Division of Economics of the Planning Board. Net Income from Abroad'. Defined as all income received by the residents of Puerto Rico, net national income includes receipts from abroad and exludes income sent abroad, even though locally-originated. Net yields on foreign capital make up one of the principal items included in the “Rest of the World sector. By net we mean the difference between yields produced by Puerto Rican capital placed abroad, and the yield on outside capital invested in Puerto Rico. The estimate of the net volume of these yields has been based on the annual increase forecast for net foreign investment, calcu lated as a residual between total investment in Puerto Rico and projected internal savings. A rate of yield has been ascribed to this annual increment in net investment. In the case of direct investments, for example, this rate amounted to 16%. Further, the analysis of yields on direct investments in Puerto Rico was extended to include a breakdown by industrial sectors. Although such a breakdown does not ordinarily figure in na tional income statistics, distribution for past years was calculated. using balance of payments data for the most part. For purposes of the projection the total increment previously calculated was distributed in proportion to the marginal increase registered in each of the sectors in recent years. With respect to the other items that form a part of the "Restof-lhe-World” sector, the projections assume that capital yield on loans will continue past trends. An analogous procedure was fol lowed for the estimate of yields on Puerto Rican investments abroad. One item ordinarily included in this sector is that of income of farm laborers who work in the United States during a certain period of the year. The projection is based on the trend of recent years, under the assumption that with time the annual in crease will diminish. Projections on Fixed Capital Investments'. By definition fixed investments include government investment such as the construc tion of highways, schools and hospitals and other public works. as well as corporate investment in plant and equipment. It is advisable to make this separation for purposes of calculating the total fixed investment which must be maintained at a given moment. Of course, lack of data often leads to the practice of relating total fixed investment to total production: for example, gross product. The capital-output factor which ordinarily is used to

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determine how much capitalization effort will be required by a given rate of increase in production is usually computed on the basis of these two aggregates of investment and production. However, it is evident that production capacity itself is far from uniform among the different investments. For our projections, separate calculations were made of government investments in public works, investment in housing, and remaining investments in plant and equipment. With respect to the first, the figures projected derive from prior analyses of the need for public works — in particular, high ways and schools. The projection of investment in housing is in response to the two following assumptions: (1) Average invest ment in public housing each year is expected to reach some S17 million, allowing for the construction of 2.000 public dwellings annually, the average amount constructed in recent years. (2) By 1975 private housing construction, will represent 3% of gross product, as has been the case heretofore. It should be pointed out that in comparison with estimated housing needs, this level of investment is not sufficient to provide every family with adequate housing. The projection expresses the volume of in vestment in housing which logically' can be expected to develop in Puerto Rico spontaneously; hence it does not take into account any accelerated housing plans such as the one the government cur rently is formulating. Referring now to the projections on investment in plant and equipment, the ideal procedure would be to estimate the invest ments required in each of the sectors of the economy' in order to achieve the projected rates of increase. However, in view of the serious statistical deficiencies in this field, we had to resort to a calculation of over-all investment in relation to the growth of gross private product. The technique employed here was the well-known one of capital-output ratio. An analysis of the 1947-1955 period resulted in a capital-output ratio of .46. This means that to achieve an annual increment of 7% in gross private product the investment in plant and equipment needs to amount to 15% of the gross private product. To compare these results with those obtained in other countries is somewhat difficult because the concepts of output and investment used in calculating the capital output ratios are not the same. It should be remembered that in our case “output” is represented by gross private product and not gross national product, and “capital” is made up solely of invest ments in plant and equipment; in others words, investments in housing, highways and other public works were excluded. Be that as it may, it is interesting to note that capital-output ratios similar to our 0.46 have been calculated for Latin Amer ica. Our projections are based on the hypothesis that this ratio will increase up to 1960 and thereafter remain constant. This line

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of reasoning is based on the fact that in the last few years an upward trend seems to be in evidence. A possible explanation is that part of the recent investment in machinery has been with the object of saving labor and not necessarily increasing produc tion. A case in point is cane growing, in which substantial in vestments have been made in machinery, despite the production quota system that has been in effect since 1953. In addition, for some years past a large proportion of total investment was chan neled to areas in which the capital-output ratio is high — for ex ample, oil refineries. Considering the three foregoing types of investment jointly. an investment coefficient of 21% of gross product was assumed for 1975. This coefficient already was achieved in Puerto Rico in the last two fiscal years, 1956-57 and 1957-58. Inventory Accumulation and Total Cross Investment: The to tal gross investment of a country comprises not only the gross in crease in fixed investments but also any increment that may have taken place in inventories or slocks of goods. Logically, when real sales increase in an economy, inventories follow suit. This trend is traceable at long term. It would be very laborious to make a detailed study of inventory increases in the various sectors of the economy. For purposes of our projections, a simple method was adopted, which may be explained as follows: The absolute increase in gross product between 1947 and 1955 was determined, at constant prices. Then the total increment in inventories during the same period was cumputed by addition, also at constant prices. The next step was to determine the ratio be tween the increase in inventories and the increase in gross product. which amounted to 22.3 percent. This percentage, applied to the projected increase in gross product between 1955 and 1975 made it possible to estimate the sum of all annual increases in inventories. To determine the magnitude corresponding to each specific year. it was assumed that the level of inventories will rise year by year in geometric proportions. Total gross investment was then determined, by adding fixed investments and the change in inventories. Total gross invest ments in Puerto Rico amounted to some S200 million in 1955. The 1975 forecast is S868 million at 1955 prices. Savings and Investment: Here I should like to remind you that fixed investment is defined as gross investment in fixed goods: that is, apart from comprising the net addition of capital to pro ductive capacity, it also includes the investments needed each year to replace depreciated capital. The fundamental sources of financing to which the economy must look for gross investments are as follows: local savings of the government; net local savings of local companies; depreciation

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reserves of local companies; domestic savings of private individuals; and net foreign investment. It is necessary to distinguish between the above sources of local savings because they vary to a marked degree and follow disparate growth trends. In a year such as 1955, for example, internal local savings amounted to some §115 million, or approximately 60% of total gross investment for that year. What is the outlook for growth in local savings? And by the same token, what is the necessary volume of outside invest ment? Government savings have reached substantial levels during re cent years, having amounted to some S31 million in 1951-55. I should mention that government savings include premiums collected for Social Security, which actually are in the nature of savings of individuals. The prospects are that these government savings will con tinue to increase — in part of necessity, since debts contracted must be amortized, and in part because the current trend clearly points toward an extension or intensification of Social Security type systems. The projection of government savings assumes an increase that will be proportionate to total gross product. Corporate savings, of course, are equivalent to profits retained by individual companies. The world over, these retained prof its normally come to constitute a major source of financing of company investments. In Puerto Rico in 1950 undistributed cor porate profits amounted to some S6 million. By 1955 the figure had climbed to §25 million. Of course, a large part of this in crease was due to the creation of new companies and the invest ment made in them, but another goodly share is the result of the mechanization of existing enterprises. Productivity in Puerto Rico has shown a substantial increase in recent years, and so also, wages. Parallel to the upward movement in both these cases, investment in machinery has been expanding at a rapid rate. It is believed that productivity as well as wages will continue this ascending trend in the future. Therefore, investment in machinery not only will come from new firms but also from the greater mechanization of existing ones. Ry way of example, the ratio of retained corporate profits to net income was in the neighborhood of 2.7% in 1955. The projections are based on a ratio of 3%. or slightly less than that observed in the United States in 1955 (3.2%). Finally, we must take up personal or family savings. The per centage of savings in this case is considered an instrumental vari able: that is, a variable that can be materially affected by the corresponding government policy. Nonetheless, when plotting the future course of the coefficient of personal savings, we were guided not by what ideally could be considered the best state of affairs,

ECONOMIC DEVELOPMENT PROJECTIONS but rather what is most likely to happen. Everyone will agree that it is a difficult task to bring about a significant increase in per sonal savings. Puerto Rico’s case is worth examining in this respect. For the past several years personal savings in Puerto Rico may be said to be non-existent. Nevertheless there is a current of opinion to the effect that such savings will begin to grow automatically. At the same time, there are well-founded arguments which lead to the conclusion that an automatic growth in savings should not be taken for granted, and therefore a specific policy aimed at achiev ing that end is necessary. The arguments of those who maintain the latter point of view are familiar: They point out that in the first place when income increases from a mere subsistence level it continues to be consumed or spent in its entirety, and family con sumption still consists solely of food and other items of prime neces sity. ft is significant that in the United States, for example, al though personal income rose considerably in the present century. the coefficient of personal savings did not increase. Quite the con trary: It may be said to have declined. Many explanations have been given, such as urban concentration, and the greater propen sity of urban families to spend, the increased number of wage earners (who show a higher propensity to spend than entre preneurs), and the so-called “demonstration effect.” To all these in Puerto Rico’s case one might add that the increase in land and real estate values has had the effect of increasing purchasing power and. therefore, consumption expenditures. The projections assume that the percentage of savings will increase gradually, to reach 5% of gross product by 1975. (This was the percentage relationship observed in the United States in 1953.) Some persons believe that the evolution of private savings is very conservatively estimated and that higher coefficients are certain to be achieved. Another source of financing of gross investment should be added to the list —■ amortization or depreciation reserves. We have already explained how the corresponding projection was made, and mentioned that the 1975 forecast on depreciation reserves amounted to 8283 million. Taken together, domestic savings amounted to S115 million in 1955 and should reach 8677 million by 1975. Thus local funds by that year will be sufficient to finance approximately 80 percent of total gross investment. As we mentioned earlier, the present pro portion is approximately 50%. The difference between total gross investment and domestic gross savings gives us the figure on necessary net investment from abroad. On the basis of the foregoing reasoning, this investment (which in absolute terms must increase considerably) is expected to drop in relative terms from the present proportion of 50% to approximately 20% by 1975.

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This underscores the enormous importance of outside invest ment in Puerto Rico’s economic development. As a matter of fact, the type of industrialization program presently under way in Puerto Rico in itself testifies to that importance. Other Economic Projections: Apart from forecasts of gross product, net income, net income hy sectors, investment, savings, and foreign investment, still other analyses have heen made in Puerto Rico. These include analyses on personal income, the evolu tion of consumption expenditures and their distribution, etc. As you know, personal income is a somewhat different con cept than net income since it is limited to income effectively re ceived by the nation’s families. That is to say, in the case of wages and salaries actual take-home pay is considered, after having sub tracted Social Security payments and other deductions that are not really a part of the family’s income budget. The procedure followed in estimating personal income with net income as the starting point was similar to that employed in estimat ing net income by starting with gross product. That is, estimates were prepared covering items which, when added algebraically to net income, give the figure on personal income. Personal income taxes are considered a part of personal in come. Obviously, this tax must be deducted in order to estimate disposable personal income. The procedure for estimating personal income taxes was rather crude. In the process we became aware of the importance of mak ing more detailed studies for purposes of helping guide long-term fiscal policy. As a result, studies are currently being conducted on this subject in which the question of income distribution is ap proached not only quantitatively but functionally. However, as I said, a simple procedure was used in making the projections. Per sonal income taxes have the highest national income-elasticity of any fiscal revenue item. In Puerto Rico in 1955 these taxes amounted to 2% of total net income. Even though the tax rates and tax base did not undergo any change whatsoever, the percent age corresponding to these taxes rose in 1956 to 2.9% and, in 1957, to 3.2%. The increment was due in part to an increase in incomes and in part to the institution of the tax-withholding system. In any event, because the tax rate is progressive it is anticipated that the growth in personal taxes will be more than proportionate in comparison with net income. Tn the United States in 1950 this tax represented approximately 9% of net income. Since the trend in Puerto Rico has also been markedly upward, the assumption was made that the percentage will gradually increase until it reaches 9% in 1975. Obviously, once personal income, income taxes, and personal savings are calculated, the estimate on personal expenditures auto matically results. The projections show consumption expenditures

ECONOMIC DEVELOPMENT PROJECTIONS

for 1975 on the order of 82.6 billion at 1955 prices, or $1,180 per inhabitant, taking into account the corresponding pop ulation forecast. Compared with the 8430 for 1955, the 1975 figure represents a substantial rise in the standard of living. The increase, however, is a good deal less than that anticipated for income, since 9% of personal income must go for income taxes and approximate ly 7% will be saved. The increase in both income taxes and personal savings are highly significant. Under the coefficients expected in Puerto Rico consumption will increase in much lower proportion than net in come. Concretely: the elasticity of consumption expenditures with respect to total net income is calculated at .70. This means that, for every 10% increase in net income, consumption expenditures will rise by only 7%. The implication is that for an industry producing articles for local consumption (for example, consumer services) to grow between 1955 and 1975 in greater proportion than the remaining industries, it is not only necessary for the con sumption of that article or service to be elastic but that that elasti city between the years mentioned be at least 1.43, and probably higher. This explains in part why certain services having a con sumption with a known elasticity greater than one in relation to total consumption do not grow in terms of originated net income in greater proportion than total net income. It is very useful for government agencies as well as private companies to be able to anticipate the future evolution of consump tion expenditures. There is no doubt but that the best way to ef fect this projection would be to estimate first the distribution of family income and then examine the probable consumption of the families falling within each income interval, in accordance with whatever studies might be available on distribution of expenditures by economic level. An ample study of this type was carried out in Puerto Rico by the Department of Labor in 1953, following the sampling technique. In addition a technique is being perfected to project the distribution of family income. We have the elements necessary to employ the above procedure: however, a more simple method has been followed in the projections made up to this time. Increases in the real income of Puerto Rican families have been accompanied by variations in the distribution of consumption expenditures, which are taking on a structure increasingly approxi mating the budgets of expenditures appropriate to high-income countries. Furthermore, special studies of family budgets in Puerto Rico demonstrate conclusively that consumption habits of Puer to Rican families are very similar to those of families in the United States, given equal income levels. As staled earlier, the projec tions for Puerto Rico indicate that in 1975 an average level of fam ily income will be reached similar to that of the United States in 1950. Therefore, the projection of personal expenditures in Puer-

PROCEEDINGS ECONOMIC PLANNING SEMINAR

lo Rico for 1975 implies a percentage comparison or breakdown which is almost analogous to that of the United States in 1950. We have already pointed out that this assumption is supported by the trend of recent years. There are, however, two principal exceptions: expenditures abroad, and expenditures of foreign tourists in Puerto Rico. In both cases the percentages predicted for Puerto Rico are much higher. The proportion of expenditures abroad of Puerto Rican tourists is at present a great deal higher than in the case of the United States. This is not surprising, despite the lower incomes which prevail here, because of Puerto Ricans’ propensity for for eign travel. Since 1953 the percentage in relation to total ex penditures has exceeded 3%, compared to a scant 0.6 percent in the United States. In the projection for Puerto Rico the 3% propor tion is considered to remain constant. In similar fashion, the per centage represented by foreign tourist expenditures in Puerto Rico already is much higher: around 2.6% as against 0.2% in the United States in 1950. The projections, then, lend to reflect these differences, and the percentage is assumed to remain constant at 2.6. Productivity Projections: As mentioned earlier, one way in which the recent projections differ from the ones made in 1950 was the inclusion of production by sectors, with the principal aim in view of obtaining a more detailed picture of the employment situation. However, the level of occupation or employment in any industry depends on two factors —• production and productivity. The method followed in projecting production by sectors al factor cost or net income by sectors has already been explained. 1 shall therefore proceed to a discussion of the outlook for producti vity. Economic development in Puerto Rico has brought with it a profound change in the employment structure. Perhaps one of the most revealing phenomena in recent years has been the displace ment of employment toward activities with greater productivity and offering higher wages. Il is ordinarily taken for granted, of course. that economic development is accompanied by a displacement of the economically-aclive farm population. In this sense, Puerto Ri co’s case is one among many, with the exception of the fact that the displacement here has been extraordinarily heavy. Between 1950 and 1958 — that is, in the course of only eight years — farm employment has dropped by almost 30 percent. Stated in another way, in 1950 agricultural employment constituted -36 per cent of total employment; by the past fiscal year (1957-58), that proportion had declined to 27 percent. However, as already in dicated, it is generally agreed that this displacement will invariably accompany economic development in greater or lesser degree. Something not commonly heard of is an analogous and general

ECONOMIC DEVELOPMENT PROJECTIONS

displacement that shows up in all activities characterized by low productivity. On the basis of Puerto Hico’s experience, an accurate generalization would be that economic development is accompanied by a gradual displacement of the economically-active population out of low-productivity sectors into others. In this way the case of agriculture would be simply another example of the general trend. To illustrate: the drop in employment in the home garment in dustry in Puerto Hico between 1950 and 1958 amounted to ap proximately 39,000 persons. Here we have a case of displacement in an industry involving manual skills. A decrease in employ ment of an estimated 4,000 occurred in the tobacco-stripping in dustry — an activity classified as manufacturing. During the same period, the employment level in the domestic service sector was re duced by another 15,000. Although these activities belong to dif ferent sectors of the economy, they have a common denominator: low productivity and low wages. In 1956-57 these four industries where employment was on the wane paid average salaries of S671 per employee per year, while the remained paid their employees remuneration amounting to 82,116 per year. In consequence, between 1950 and 1958 the gross output per employee (at constant prices) increased at a lower rate in agri culture (4 percent per year) that in the rest of the private econ omy (5 percent per year). However, the logical outcome would have been a greater increase in agriculture, in such way that the differences between the two sectors in output per employee (which in 1958 amounted to 81,100 in agriculture, compared to 82.300 in the remainder of the private economy) would tend to decline at least in relative terms, as is believed will happen from this time forward. All the foregoing leads to the conclusion that the displace ment outlined above induces automatic increases in general produc tivity measured in terms of total production per worker. However, such increases do not escape notice under our method because the estimates of production by sectors presumably reflect these structural changes. However, it is only fair to point out that any variation of this nature which might take place within a single sector is omitted. More accurately, it is likely to show up as an increment in pro ductivity as such in the sector involved when in reality it mav be the result of simple structural changes. What I should like to discuss now are productivity projections for each of the sectors. Before proceeding. I should like to present my apologies for the violation of scientific discipline committed by accepting the term “productivity.” However, we believe that bv doing so we sacrifice clarity only slightly in favor of a very important saving in time.

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Social accounts, at least in Puerto Rico, do not indicate true by-sector production. The closest thing to it is net income by sector; but then we also found that we lack an individual price index. However, it appears that it is necessary to work with constant prices when studying the evolution of productivity. Hence we simply divided net income at current prices by the consump tion expenditure deflation index and thereafter divided the result by employment in the respective sector during the year under study. The quotient was termed “productivity” at constant prices. As you will have observed, the projections of net income by sectors used a fairly sizeable breakdown by sectors, particularly in the rather large services group. However, in the study and pro jection of productivity, the services sectors were grouped under two broad classifications: (a) transportation, communications and public services; and (b) others. The reason for this was that the figures annually compiled on a sampling basis do not afford suf ficient data by sectors to enable the formation of the productivity series, in greater detail. In the manufacturing industry, however, employment figures are available on an ample group of sectors, owing to the compila tion of monthly statistics on the basis of an ad-hoc sampling of fac tories. Productivity, as defined here, can increase not only as a result of an increase in productivity as such, but because of struc tural changes. For example, an increment in the proportion of factories or plants having a high concentration of capital, such as oil refineries, can bring about an increase in the estimated pro ductivity of the manufacturing industry as a whole even though real productivity in each industry remains constant. For this rea son we proceeded to project the hypothetical structure of the man ufacturing sector. Later, when an input-output table is available, a more precise analysis can be made regarding industrial structure. The projection for a majority of the groups proceeded on the hypo thesis that the future increase in each of the sectors would be pro portionate to that registered between 1950 and 1956. In general, productivity in each sector was projected by ex tending past trends. In every case the evolution of productivity in the corresponding industries in the United States was taken into account. Once the projections on production and productivity, or pro duction per employee, are completed, one can estimate the quanti tative level of employment. However, the employment analysis merits special attention, which it will receive when the topic of future demand for human resources is discussed in a subsequent session of this Seminar. The book on projections mentioned earlier contains other pro jections of an economic nature, such as distribution of income, distribution of gross product, etc. By way of a sample of regional-

ECONOMIC DEVELOPMENT PROJECTIONS

type projections, certain data are also included with reference to the metropolitan area of San Juan. In addition, a book of this type could not fail to include forecasts on population, economically-active population or labor force, families, etc. In the next few days you will have an opportunity to hear about the methodology employed in making all these demographic projections.

ECONOMIC PLANNING SEMINAR

October 27 —- November 28. 1958

POPULATION CALCULATION METHODS

FOR

USE IN PLANNING By

J. L. Janer Chief Bioslalistical Section of the School of Medicine, University of Puerto Rico and Ada A. G. de Colón • Statistician Bioslalistical Section of the School of Medicine, University of Puerto Rico

Lecture prepared for the Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

POPULATION CALCULATION METHODS FOR USE IN PLANNING By

J. L. Janer Chiej Biostatistical Section of the School of Medicine. University of Puerto Rico

and Ada A. G. de Colón Statistician Biostatistical Section of the School of Medicine. University of Puerto Rico

By planning we mean the preparation of a scientific and real istic program of activities channeled toward given objectives that the planning process can schedule chronologically for specified dates. Ordinarily the objectives established seek to improve the degree of collective well-being of the community for which their achievement is intended. On the basis of this definition it becomes obvious that it is necessary, or at any rate highly advisable, for the planner to have adequate knowledge of certain important or pertinent characteristics of the population for which he is planning. Some examples: (1) Number of inhabitants in the area and rate of popula tion growth (2) Geographical location of the inhabitants (municipality. district, rural or urban zone, etc.) (3) Age and sex distribution of the individuals making up the population (4) Distribution by groups and categories in accordance with certain economic and social criteria, such as: (a) literacy and schooling (b) race or color (c) legitimacy (d) profession or occupation (e) income (f) whether married, single, widowed, divorced (g) others

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Given their importance, these population characteristics gen erally are investigated hy the different countries for purposes of exact evaluation by means of censuses and periodic polls of their respective inhabitants. However, the cost of this procedure does not permit it to be carried out with sufficient frequency. In the more developed countries national censuses are taken with marked regularity at intervals of more or less ten years. In less-developed countries censuses are taken very irregularly, and there are some in which the first has yet to be taken. This lack of uniformity from country to country with respect to census-taking and the quality of results necessarily has a bear ing on the planning job. In those areas or countries lacking bonafide information with respect to the size and characteristics of their respective populations, planning efforts are considerably more dif ficult. The planner frequently needs to have population data on the community for which he is planning for dates that do not neces sarily correspond to those of censuses: The fewer the censuses taken, or the greater the chronological separation between the date for which the estimate is desired and the date of the nearest census, the more difficult it will be to make reliable estimates of that pop ulation and its characteristics. The types of population estimates or calculations generally re quired in planning government activities may be classified in the following three categories or groups: (1) A retrospective estimate covering a past date which does not correspond with the exact date of a census (2) An estimate for a current date that may be more or less removed from the date of the last census (3) A prospective estimate covering a future date, which on occasion may not be very far away but frequently is considerably distant in time. The types of calculations most frequently used for the last two classes of estimates — that might be considered the most important from a practical standpoint since they are the ones most com monly used and necessary — have been thoroughly discussed in ex cellent pamphlets prepared for the purpose by the Sub-Bureau of Population of the United Nations Department of Economic and Social Affairs. * These pamphlets were issued under classification ST/SAO/ Series A, and carry the following titles: No. 10 — Manual I: Methods of calculating the Population for Current Dates These pamphlets may be obtained for a nominal charge directly from the United Nations Organization, or through one of its official agencies.

POPULATION CALCULATION METHODS

II: Methods of Evaluating the Quality of Basic Data for Use in Population Estimates No. 25 — Manual III: Methods of Preparing Population Pro jections by Sex and Age. There is no specific publication that we might refer to or rec ommend in the case of retrospective population estimates. How ever, the problem that might arise on occasion from the need for estimates of this type could easily be solved through an intelligent adaptation of the methods recommended for estimates for current and future dales involving, of course, the introduction of all neces sary variations. Since censuses constitute the fundamental basis for the realiza tion of these estimates, the principal factors that have a bearing on the accuracy or reliability of the latter are the following: (1) Accuracy of the basic census data. (2) Relative accuracy, or comparability, of data from different censuses. (3) The length of the intervals between censuses, and for the specific case of prospective estimates, the amount of time that has transpired since the last census used. (4) The applicability of the calculation method chosen. When the population estimate is made for a date within the period covered by the interval between the first and last censuses used, the estimate or calculation is said to be done by interpolation. If, on the other hand, the estimate is made for a date prior to the first or subsequent to the last of said censuses, the procedure utilized carries the name extrapolation. This procedure is subject to more specific designation as retrospective or prospective, as the case may be. If the extrapolation is made for dates prior to the first of the censuses used, it is retrospective. If it is made for dates subsequent to that of the last census, it is prospective. These ex trapolations occasionally are called also retrospective projections (toward the past) or prospective projections (toward the future). A word of caution, however, is in order: As we shall see later, the terms extrapolation and projection should not be considered as pre cisely synonymous. Generally speaking, only on rare occasions does the planner have to work with retrospective projections or extrapolations. Most of the time the performance of his task calls for population estimates or calculations covering present and future dates. Among the most frequently used methods for population com putation for non-census dales we believe that the following are the most valuable from a practical standpoint: No. 23 — Manual

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Arithmetic progression Geometric progression Extrapolation equations having multiple variables Mathematical adjustment of census figures used in plotting curves implying a greater or lesser degree of mathematical complexity, such as: (a) Second-or third-degree parabolas (b) Gompertz curve (c) logistic curve (d) others (5) Graphic method (6) Vital statistics method (7) Pro rata method (8) Method involving components of population growth A detailed discussion of each of these methods is presented below, together with an indication of the principal advantages and disadvantages attendant on their application.

(1) (2) (3) (4)

(1) Method oj Arithmetic Progression This method assumes that the population of a community in creases by a constant amount per unit of time.. The problem in applying it is therefore reduced to ascertaining what the constant amount is that represents population increase in the community per unit of time. In determining that amount, recourse is ordinarily had to the experience of the two consecutive censuses closest to the dale for which the estimate or computation is desired. The difference in the size of the population as a whole or of any of the age, sex, and other component groups as revealed by the results of the two censuses is divided by the exact number of limes that the unit of time chosen goes into the interval be tween the dales corresponding to said censuses. Having thus de termined the constant amount of population increase per unit of lime, to project the population to a given post-census dale all one has to do is multiply that constant amount by the exact number of times that the time unit goes into the interval between the date of the last census and the date for which the estimate is desired. The amount thus obtained will represent the expected increase in the population of the community between the date of the last census and that of the estimate. By adding this amount to the population figures given in the last census the desired estimate is obtained. If instead of calling for an estimate of population at a post census date the information need is for an inter-census date (which necessitates an interpolation rather than an extrapolation) the estimate can he obtained in one of two ways: a) by adding the constant amount of increase to the population registered in the first census as many times as the unit of time chosen to express

POPULATION CALCULATION METHODS

the rate of increase goes into the interval between the date of that census and the date for which the estimate is desired; or b) by subtracting the amount of increase per unit of time from the last census as many times as said unit goes into the interval between the date of the calculation and that of the census. The same procedure can be used for purposes of retrospective calcula tion of the population corresponding to a date prior to the first of the two censuses. In this case the operation would be one of retrospective extrapolation, and the procedure would be basical ly identical to the one already described with respect to prospective extrapolation for post-census dates, except that instead of adding the constant amount we would subtract it, taking as the starting point the figure corresponding to the first of the two censuses used. The arithmetic progression method has enjoyed universal ac ceptance for estimates of this type when the estimate dates are fairly close to those of the censuses that serve as the basis for the computation. Experience has shown that the results as a general rule are quite close to reality when care is taken not to move estimates too far away from these censuses, prospectively or retrospectively, and in the absence of any event or change in the community which might exert a rapid and marked influence on population growth patterns. The universal acceptance mentioned is due in large part to the simple nature of the computations which use of the method implies. Nevertheless, caution should always be exercised in its application because any phenomenon that develops in arithmetic progression can be graphically rep resented on an arithmetic scale by a straight line, and natural phenomena rarely evolve in a straight line even though short-term observation at limes may appear to indicate that such is tire case. For this reason this method is generally used when the estimates sought correspond to dates which do not go beyond that fixed for the next census, and provided that censuses are taken in the area with a certain degree of regularity and relative frequency. The employment of this method is not advisable for long-term prospective or retrospective projections. The following example will illustrate the use of the arithmetic progression method in the computation of population estimates: Problem-. We need to estimate the population on Country X: (a) as of January 1, 1958 (hi as of July 1, 19'16 (c) as of January 1, 1938 The only data available for use in making these estimates are those corresponding to the censuses taken in the country on January 1, 1940 and April 1, 1950. The first of these two censuses polled a population of'410,000 inhabitants, and the second, 492,000. Solution The first step in the computation of these estimates consists

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oí determining the constant amount of population increase per unit of time which these figures imply. A comparison of the two censuses indicates an increase of 82.000 persons between January 1, 1940, and April 1, 1950. This increase occurred at an interval of 10-1/4 or 10.25 years, represent ing the time that transpired between the date of the first census and that of the second. Dividing the increase of 82,000 inhabitants by 10.25 years, we obtain an average an nual rate of increase of 8,000 inhabitants. This is the constant amount of increase per unit of time that we were seeking. Case (a) : It is necessary to estimate the population of Country X as of January 1, 1958. There are 7-3/4 or 7.75 years between this date and April 1, 1950, when the last of the two censuses used in the computation was taken. At the annual average rate of increase already calculated (8.000 inhabitants per year), a total increase of 62,000 inhabitants is anticipated during that period (i.e., 8,000 inhabitants multiplied by 7.75 years). By adding this amount to the 1950 census figure of 492,000 inhabitants, we arrive at 554,00 as the estimated population of Country X as of January 1, 1958. This calculation was made by prospective extrapolation. Case (b) : We now desire to estimate the population of Country X as of July 1, 1946. This date is situated prospectively 6.50 years from the date of the first census (January 1, 1940) and retrospectively 3.75 years from the date of the second census (April 1, 1950). Therefore, we can make the computation in two ways: a) by adding to the 410.000 inhabitants polled in the 1940 census the amount of 52,000 which represents the population increase between that date and the date of the estimate (8,000 inhabitants multiplied by 6.50 years) ; or b) subtracting from the 492,000 inhabitants counted in the 1950 census the amount of 30,000 inhabitants (8,000 inhabitants multiplied by 3.75 years) comprising the popidation increase which had not yet taken place in the country on the date of the estimate but would later be necessary to reach the 1950 census figure. Both operations give us exactly the same figure of 462,000 persons, which is the estimate we were seeking. In this case the calculation was made by interpola tion. Case (c) : Here we are interested in estimating the population of Coun try X as of January 1, 1938. Between this date and the 1940 census there is an interval of exactly two years. At the rate of 8,000 inhabitants per year, the population increase in Coun try X during these two years must have been 16,000 in-

POPULATION CALCULATION METHODS

habitants. By subtracting this figure from the 410,000 inhabit ants polled in the 1910 census we arrive at the estimate of 394,000 inhabitants as of January 1, 1938. In this case the calculation was made by retrospective extrapolation. (2)

Method of Calculation by Geometric Progression

In contrast to the arithmetic progression method which presupposes a rate of increase in a constant amount per unit of time, the method of geometric progression is based on a rate of increase expressed in terms of a constant proportion per unit of time. Therefore, the calculation in these cases is carried out in the same manner as compound interest computations. A popula tion which increases in geometric progression — that is, in a constant proportion — follows the formula shown below: 1’1 = Po (l+r)t ..................................................... (1) where: Po = population at the beginning of the period Pi — population at the end of the period t = exact number of years during the period (if the time unit chosen is one year) r = annual rate of increase (if the time unit chosen is one year, as is the usual case) The annual rate of increase is determined in these cases on the basis of the figures corresponding to the censuses utilized in the computation. For this purpose the following transformation of formula (1) above is used: (1 + r)t = P,..............................................................(2) Po from which we obtain: (1 + r) = t

p, .........................................................

A Po

(3)

In other words, the rate of population increase during the in terval between the two censuses used for the computation would be expressed by the ratio Pi where Po is the population polled in the Po first census and P1; the population polled in the second. The annual rate of increase would be represented then by the t-nth root of said amount Pi. ~Po This last operation makes it possible to express the rate of increase in terms of a smaller and more convenient unit of time than the interval between the two censuses that serve as the basis for the compulations. This facilitates the estimation of the popula tion at time periods as brief as the unit chosen. As can be easily

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demonstrated, the root to be extracted depends on the number of times that the unit chosen goes into the interval between censuses. One year is usually — but not necessarily — the unit selected. Thus, if it had been necessary to compute the annual rate of increase instead of the annual numeric increase in the example used to illustrate the application of the method of calculation by arithmetic progression, the operation would have required the ex traction of the 10.25th root of the rate obtained from dividing the population polled on April 1, 1956 by that polled in the previous census of January 1, 1940. However, if instead of a year the time unit chosen were a quarter then the 41st root would have had to be extracted, since this is the exact number of quarters in the interval of 10.25 years which transpired between the two censuses. The great advantage of the latter estimate (the quarterly rate) over the first lies in the fact that it enables the calculation of estimates at the shorter quarterly periods — which it would not have been possible to obtain directly from the an nual rate. In the last analysis, the choice of the time unit for use in expressing the rate of increase will have to depend on the end use for which the calculations are intended. The need for root extraction makes the method of geometric progression a good deal more complicated than the arithmetic pro gression method described above: To solve the equation rep resented in formula (3) which must be done in order to determine the rate of increase per time unit chosen), it is almost always necessary to resort to the use of logarithms, a slide rule, or a table of compound interest. If we establish the premise that the growth of a given popula tion is developing in geometric progression, we are indicating thereby that the chronological variation in its size will occur in a constant proportion per unit of time. Or, as this idea is some times expressed, the relative increase in population will be constant per unit of time. Therefore, once this rate of increase is determined quantitatively by means of the operations we have just described, it is easy to calculate the number of inhabitants or population size for any date subsequent or prior to that of the census or estimate used as the base figure or starting point. For short-term prospective computations, it is sufficient to make a relatively limited number of multiplications, while retrospective calculations require one divi sion operation also. For long-term estimates or projections, however, we would very probably find ourselves obliged again to resort to the use of logarithms, a slide rule, or a table of compound interest, to simplify the operations. Thus, if we have a population Pn ■which is known to us at a given data “a” and have established that its annual rate of increase

POPULATION CALCULATION METHODS

amounts to 2%, within exactly one year that population will have increased 1.02 times. That is to say: Pa + 1 = P„(1.02) where: Pa — known population as of date “a” Pa + 1 = population for estimation as of date a + 1 — that is, one year later 1.02 = annual rate of growth This ratio can also be expressed as follows:

From this ratio we can deduce that the estimate can be made prospectively as well as retrospectively, as desired. For example. if the estimate sought is that of the population on date fa — 11 instead of dale (a + 1) the former ratio would become the fol lowing :

pr=T = L02

In this case the unknown population for determination would be that expressed by the denominator instead of the numerator as W'as the case in the previous example. If we resolve the equa tion algebraically, we find that: P„ - 1 = P„ 1.02 In other words, to obtain the desired estimate in the first case the operation required would be a multiplication, while in the second it would be a division of the base population by the rate of increase during the interval between the dale for which the estimate is being made and that corresponding to the base population. If the annual rate of increase and the base population are known, and an estimate is desired for a given date that is separated chronologically from the base date by more than a year, the opera tion would be carried out in a similar way by applying original formula (1). Let us suppose that in the foregoing example one desires to estimate the population on date (a + 5) instead dale (a -f- Il in this case the population to be estimated would be expressed in terms of base population P„ as follows: P„ + 5 = P„(1.02)5 By solving this equation we would obtain the figure corresponding to the desired population estimate: Pa + 5. The reason for multiplying by annual rate of growth raised to the fifth power in this case — (1.02)5 —■ can be better un

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derstood by following the development of that factor through the following steps:

Pa + 1 = Pa (1.02) P + 2 = P + 1 (1.02) = (P

(1.02)

(1.02) = Pa (1.02)2 Pa + 3 = Pa + 2 (1.02) = (Pa (1.02) (L02) )

(1.02) = Pa (1.02)3 Pa + 4 = Pa + 3 (1.02) = (Pa (1.02) (1.02) (1.02) )

(1.02) = Pa (1.02)4 Pa + 5 = Pa + 4 (1.02) = (Pa (1.02) (1.02) (1.02) (1.02) }

(1.02) = Pa (1.02)5 By expressing the population we desire to estimate in terms of the base population rather than of the estimated population for the immediately preceding year, we discover that the calculation is equivalent to multiplying the base population by the factor corresponding to the rate of growth per time unit as many times as said unit goes into the interval between the date for which the estimate is desired and that of the base population. If the desired estimate had been retrospective instead of prospective with respect to base population Pa, but involving no change in the magnitude of the time interval, the computation would have been made in a manner similar to that followed in the above example. The result would have been obtained from ap plying the following ratio: Pa + 5 — Pa (1.02) = Logarithms are generally used in making the computation if the exponent indicating the power to which the growth factor per unit of time must be raised contains decimals or is very large be cause the projection is made at long term. To illustrate the use of the method of geometric progression in the computation of population estimates, the following example is provided. It is based on the same data employed in demonstrat ing the use of the arithmetic progression method.

POPULATION CALCULATION METHODS

Problem: We need to estimate the population of Country X: (a) as of January 1, 1958 (b) as of July 1, 1946 (c) as of January 1, 1938. The only data available for these estimates are the censuses taken in the country on January 1. 19-10 and April 1, 1950. The first of these censuses shows a population of 410,000 inhabitants, and the second, 492,000. Solution-. Although a careful analysis of formula (1) and of the significance of each of its component terms points up the possibility of obtaining the desired estimates by applying that formula directly and making the necessary substitu tions, the general practice is not to follow a computation procedure of that sort. This is becase it is almost always important to ascertain at the outset the rate of growth of the population for some convenient unit of time — ordinarily one year. Taking this circumstance into ac count, the first step in formulating the estimates will consist of determining the rate of population increase in the interval between the two base censuses. This may be obtained in simple fashion, by dividing the population registered in the second census by that polled in the first. In the specific case at hand: 492,000 -t- 410,000 = 1.20 The result of this operation (1.20) is the rate of increase for the interval between the two censuses which, in this case, amounts to exactly 10.25 years. To express this rate of increase on an an nual basis, (R„), if the time unit selected is one year, we would then make use of the following ratio which derives from formula (3) presented in one of the earlier paragraphs of this text: 10.25 R„ = V 1.20 After solving this equation with the aid of logarithms we would have: log R„ = ]Og 1.20 + 10.25 — 0.0791812 + 10.25 = 0.007725 R„ = antilog 0.007725 = 1.0179466 The last amount is none other than the annual rate of growth (Ra) that we sought. By rounding off the fourth decimal for the sole purpose of simplifying the calculation, we then have the figure 1.0178. In other words, the population under study has been grow ing at an average rate of 1.79% per year. Having thus determined the rate of growth of the population under study, a direct application of formula

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(1) discussed previously will suffice in making the estimates for each of the dates indicated in the problem (cases a, b and c). Formula (1) governs the growth of any popula tion having a rate of increase (or decrease) that fol lows a geometric progression pattern. By making the proper substitutions in said formula one can proceed to compute the desired estimates: (a) We need to estimate the population as of January 1, 1958: pJanuary 1, 1958 = pApril 1, 1950 <’ + r) 7-75 rcars PJanuary 1, 1958 = 492.000 (1.0179) 775 log p1958 = log 492.000 4- 7.775 log 1.0179 = 5.6919651 + 7.75 (0.0077051) — 5.7516796 p1958 — antilog 5.7516796 = 564.520

In estimating the. population as of July 1, 1946, the opera tion can be accomplished in two ways (as in the case of interpolation in the arithmetic progression method) : (1) Calculating retrospectively: pJuly 1, 1946 = p April 1, 1950 (1 + r) 3-75 >"“rs = 492,000 (1.0179)’-7' log p1946 = log 492.000 — 3.75 log (1.0179) — 5.6919651 3.75 (0.0077051) = 5.6630710 p1946 = antilog 5.6630710 = 160,332 (b)

(2)

Calculating prospectively: PJuly 1, 1946 = pJanuary 1, 1910 <7 + ') — 410.000 (1.0179) °-50 log p1916 = log 410.000 + 6.50 log 1.0179 — 5.6127839 + 6.50 (0.0077051) = 5.6628671 p1946 = antilog 5.6628671 = 460.116

We call attention to the fact that in this case, in contrast to to the arithmetic progression method, the results obtained by prospective and retrospective interpolation do not coincide exactly. The slight difference observed is due to the fact that the annual rate of increase used is an ap proximation to the fourth decimal of the real rate. For all practical purposes, however, this small difference may

POPULATION CALCULATION METHODS

be considered completely unimportant. Nonetheless, in similar instances it is advisable to base the interpolation on the census nearest the date for which the estimate is to be made (in this case, the 1950 census). (c) An estimate of the population as of January 1, 1938 is needed: pJanuary 1, 1948 = pJanuary 1, 1940 (1 + r)2 *“'• — 410,000 (1.0179)2 log p1938 = log 410,000 — 2 log 1.0179 = 5.6127839 — 2 (0.0077051) = 5.5973737 p1938 = antilog 5.5973737 = 395,707 The following table compares the results obtained by using each method — arithmetic progression and geometric progression — in computating the population figures called for in the problem chosen as an example to illustrate the application of the two procedures: Number of Inhabitants according to the: Date of Estimate

Arithmetic Progression Method

Geometric Progression Method

January 1, 1958 554,000 564,520 July 1, 1946 (a) retrospective interpolation 462,000 460,332 (b) prospective interpolation 462,000 460.116 January 1, 1938 394,000 395,707 These results serve to underscore one of the principal characteristics which distinguí: sh the geometric progression method from that of arithmetic progression when the same base data are used. This characteristic may be summarized in the following terms: Prospective as well as retrospective extrapolations made by geometric progression give higher numerical results than those obtained through the use oj an arithmetic progression applied to the same data. Contrariwise, interpolations made by geomet ric progression give smaller numerical results than those obtained through the use of an arithmetic progression. The maximum divergence between the interpolations is almost always relatively small and shows up at the intermediate point of tbe interval between the two sets of data that serve as the basis for the estimates. It diminishes gradually in the measure that the data of the estimate moves within said interval toward

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either the beginning or ending points — i.e., the dates correspond ing to the two items of basic data. On the other hand, in prospective as well as restrospective extrapolation, the difference between the two estimates increases rapidly as the estimate moves farther away in time from the point which marks the nearest base information. In addition to their usefulness in estimating the total popula tion, both arithmetic progression and geometric progression may be employed to calculate specific demographic segments, such as age and sex groups, etc. When the arithmetic progression method is applied to a population segmented in this manner for purposes of partial estimates, these will add up exactly to the total population esti mate obtained independently by applying arithmetic progression to the total population figures registered in the censuses utilized as the basis for the computation. In contrast, the geometric progression method will produce partial estimates that will not add exactly to the total population figure obtained by the same procedure independently applied to the total population. Therefore, after the partial estimates are calculated, it is advisable to readjust them by pro-rating the tola] difference in such way that the sum of the segments will agree exactly with the estimate obtained by applying the geometric pro gression method to the total population recorded in the censuses chosen as the basis for the computation. Although the differences generally are small, it is worthwhile to make the adjustments mentioned, particularly when the estimates involved are for publication. Thus one aviods creating doubt with regard to their accuracy in the minds of readers unversed in the use of this methodology but who nonetheless have a legitimate in terest in the results. Simplicity of application makes both the geometric progression and arithmetic progression methods very useful for planning purposes. However, both should be used with care in projections, particularly if they cover periods of time that are very distant from the most recent census used in the calculations. We should caution further that the geometric progression method when used in long term extrapolations can easily lead to numerical results of suck magnitude as to be completely unrealistic.

(3)

Method based on Extrapolation Equations Using Multipit Variables

The use of this method requires a knowledge of the chronologic al variation behavior of some of those factors whose association, relationship, or coordination with population growth has been established through prior experience accumulated by means of ap

POPULATION CALCULATION METHODS

propriate observation in the place to which the estimate corresponds as well as elsewhere. These factors include the following: 1. population density 2. previous population growth 3. type of economic activity 4. levels of schooling of the population 5. others In conjunction with adequate mathematical procedures, the in terrelation of these variables can serve in the computation of a regression coefficient which will enable a population estimate at post-census dates. This method, however, is not very frequently used. One of the greatest disadvantages implied by its application is the complex ity of the required calculations. Nevertheless, we refer those readers interested in its use to some appropriate text on correlation, such as the one by Ezekiel.1 (4) Mathematical adjustment oí curves to a chronological series oj more than two censuses One method frequently used in the computation of population estimates is that of plotting an adequate curve, through strictly mathematical procedures, to conform to a chronological series of census residts. The type of curve chosen should correspond as faithfully as possible to that suggested by the alignment of points which under a system of coordinates graphically represent the populations polled in each of the censuses used as the basis for the calculation. The following are among the curves preferred for this tvpe of calculation: (a) Second-degree parabolas. The general equation for a curve of this type is: Px = a -f- bx + ex2 ................ (4) where: x = chronological interval in years measured from any given date, which may be one of the census dates. Px = the numerical importance or size of the popula tion at any date x years after that fixed as the base data for measuring chronological intervals. a, b and c = constants that are calculated by solving equation (4) above. For this purpose data from three censuses are needed in order to permit us to establish the three simultaneous equations 1 Ezekiel, Mordecai — Methods of Correlation Analysis, John Wiley & Sons, Inc., New York. Second edition, 1941.

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required in determining the value of each of the three unknown factors. (b) Third-degree parabolas, governed by the following gen eral equation: Px = a + bx + ex2 = dx34 In plotting a third-degree parabola one proceeds in the same manner as in the case of a second-degree parabola, with the sole exception that it is necessary to determine four constants instead of three. Hence, information must be available from four censuses in order to establish the four simultaneous equations required. For a more detailed discussion of the adjustment of second er third-degree parabolas to a series of censuses we refer the reader to the excellent United Nations pamphlet already mentioned: “Me thods of Estimating the Total Population at Current Dates.” (c) Logistic carve. This curve was discovered by P. F. Verhulst, a Belgian mathematician, and later perfected by R. Pearl and L. J. Reed, American experts in biometrics at John Hopkins University. Its general equation is as follows: y = d+ K a + rt where: 1 + e y = population to be estimated e — base of natural logarithms t = time transpired between the date chosen as the origin (t — o) and the date of the estimate, generally expressed in units of one year. r = initial rate of growth a = parameter having a value dependent on the chosen origin (t = o) d = lower asymptote K = upper asymptote To plot this type of curve is quite complicated. Therefore, before applying it, we recommend a study of the treatises on the subject writtten by recognized authorities such as Pearl2, Hagood3, and Croxton and Cowden1, among others. The logistic curve describes a long-term population growth cycle. This cycle may require a century or more for its com plete development, consisting of the following phases: 2 Pearl, R., Medical Biometry and Statistics, W. B. Saunders Company Philadelphia, 1940. a Hagood, M. J., Statistics for Sociologists, Henry Holt and Company New York, 1951, pp. 272 - 282. ' 4 Croxton. F. E., and Cowden, D. J.. Applied General Statistics, Prentice — Hall, Inc., New’ York, 1940, pp. 452 - 458.

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(1)

a gradual transition from almost stationary conditions to conditions of appreciable numerical increase in the pop ulation (2) an acceleration in the rate of numerical growth until a maximum level is reached (3) a decline in the rate of numerical growth after the max imum level is reached (4) a gradual transition toward stationary conditions As may be readily inferred from the above characterstics, when graphically presented on an arithmetic scale, the complete growth cycle described by a logistic curve is similar to a flattened S leaning toward the right. It has been demonstrated that the demographic growth of many countries that have been able to accumulate extensive census experience suggests a logistic-type course. However, it has also been observed in some cases (such as that of Puerto Rico)5 that the growth corresponding to a given cycle is interrupted before reach ing completion, continuing its course thereafter in what obviously constitutes a new cycle whose beginnings are inextricably inter twined with the preceding one. See Graph No. 1. (d) The Gompertz curve has also been used as a population growth curve. This curve describes a series in which the increment in the logarithms of the numbers correspond ing to the observed data diminish in a constant propor tion by unit of time. The corresponding equation is as follows: y = Kabt where: y — population to be estimated K = upper asymptote t = time measured from the origin, ordinarily in units of one year a, b = parameters to be determined, the value of which will depend on the rate of growth corresponding to the observed data. The method of adjustment generally recommended is that sug gested by Croxton and Cowden.” Although similar to the logistic curve, the Gomperts curve dif fers in the sense of expressing a more rapid acceleration in the first stages of growth and a more gradual deceleration in the last. A large series of census figures commonly are used in plotting logistic or Gompertz curves; however, the results of three censuses would be sufficient to plot a Gompertz curve, and the results of 5 Janer, J. L., "Population Growth in Puerto Rico," Human Biology, Vol. 17, No. 4. December, 1945, pp. 2G7 - 313. 0 Croxton, F. E., and Cowden, D. J., Op. cit., pp. 447 - 452.

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four, a modified logistic curve. This procedure, however, is not the most advisable. Growth curves such as those just described are used for the most part in long-term rather than current population estimates or calculations. However, even in the case of calculations at long term, the curves have fallen into disuse in recent years, there being a preference in favor of the application of methods that rest prin cipally on the individual variation prospects of the components of population growth, namely: births, deaths, and migration.

(5)

Graphic Method

Because of its simplicity the graphic method can be employed advantageously in population estimates which do not require math ematical exactness but only a reasonable approximation of the size of the population as of a given date that is comparatively near any of the censuses used for purposes of the calculation. Resorting to the usual system of rectangular coordinates, the method consists of drawing two scales on squared paper — or dinarily arithmetic: a) a time scale (generally the horizontal or abscissa) ; and b) a numerical scale representing the population (ordinarily the vertical or ordinate). Once these scales are set up, the population polled in a given census can be indicated by mark ing a point whose position with respect to the coordinates is such that its height over the abscissa corresponds to the number of in habitants polled, and its displacement toward the right of the or dinate in a direction parallel to the horizontal scale corresponds to the date the census was taken. If the scales have been proper ly designed for the purpose, not only one but several consecutive cen suses can be shown, using for each the procedure just indicated. The alignment of the points thus marked will suggest the type of curve followed by population growth during the period of time covered by the series of census data used. If a curve of mild contours free of oscillations or abrupt fluctuations is carefully drawn by hand or with the aid of some contrivance to make the task easier (such as a French curve, or a flexible curve, etc.), making sure that it passes through each of the points or comes as close as possible, the population at any date subsequent to the last of the base censuses can be estimated. This is done simply by project ing the curve and reading on the population scale the figure cor responding to the point at which the curve intercepts the vertical line representing the date for which the estimate is desired. Obviously, if only one census were used, there would be no basis on which to project a line of growth and, in turn, to make population estimates. If the data employed are limited to two censuses, the only line suggested would be a straight one. This line would represent

POPULATION CALCULATION METHODS

ios

an arithmetic progression on an arithmetic scale and a geometric progression on a logarithmic scale. If one uses three or more censuses, the curves suggested may be of a more complex type. For example: (a) geometric progression (b) parabolic (c) logistic (d) others The great advantage of the graphic method consists of the fact that it does not require any arithmetic or mathematical cal culations whatsoever. In addition, when used for short-term esti mates, say 5 or 10 years, the method can produce results as reli able as those obtained by following much more elaborate pro cedures. If instead of arithmetic-type graph paper one uses semilogarithmic paper (on which one scale is logarithmic — general ly the vertical one — and the other, arithmetic), the estimates can be made for a population that grows in geometric progression. Here one draws a straight line joining the points corresponding to the censuses used if these are limited to two, or comes as close as possible to the points when more than two censuses are shown; then the line is projected prospectively or retrospectively, as the case may be, until it intercepts the line representing the date for which the estimate is desired. In other words, the estimate in this instance is made in the same manner as it would be on arith metic graph paper, but the results will correspond to a growth in geometric progression rather than arithmetic progression. This is due to the fact that the scale used to measure the size of the pop ulation, by virtue of being logarithmic, makes the graphic repre sentation of the values corresponding to a geometric progression assume the form of a straight line similar to that which would plot an arithmetic progression represented graphically on arithme tic-scale graph paper. Graphs 2 and 3 show the use of the graphic method of esti mating the population, based on actual data on Puerto Rico. In Graph 2, both scales (magnitude and time) are arithme tic, and the straight line represents a growth in arithmetic progres sion. In Graph 3, however, the vertical scale, denoting the size of the population, is logarithmic, while the horizontal scale indicat ing the course of time is arithmetic. In this case the straight line represents a geometric progression. If a series of values obtained by reading points located on this straight line were shown on an arithmetic scale, the graph would not be rectilinear but curvilinear, with a constant rate of relative increase which would make the ab solute numerical increment by unit of time expand as the pop ulation grew in size. Among the principal disadvantages of the graphic method we should point out the following:

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To apply the method adequate arithmetic or semi-logarithmic graph paper is needed — something one does not always have on hand. (2) The accuracy of the reading of population size as of the date for which the estimate is desired will depend on a series of factors that are difficult to control, such as: (a) size of the scale (b) personal ability involved in drawing the line, particularly when it is not a straight one. (3) If the estimate is read by different persons, the results are not likely to coincide, and discrepancies can also show up in two or more readings by the same person. However, these differences are likely to be slight as a general rule, particularly if the scales used for the graphic representation are ample enough to facilitate reading the corresponding value. The last-mentioned disadvantage is of negligible importance when the estimates are made for the exclusive use of a single per son or agency. However, when it is necessary to make the cal culations public and give them wide circulation for the use of other persons or agencies not directly connected with the organization where the data originated, difficulties may arise with respect to interpretation of the figures. This can easily undermine public confidence in future in the population estimates formulated by the agency involved. The foregoing points up the great advantage of employing strictly mathematical methods when estimating the population: No matter who performs the mathematical operations (and provided variations are not introduced), the results obtained through the use of a given procedure have to coincide exactly. (6) Vital Statistics Method (1)

The vital statistics method is very useful when it is necessary to make current population estimates for subareas, segments or re gions of a larger community (slate, country, etc.). When apply ing this method it is necessary to have reasonably reliable statistics on the total population of the community as of the date for which one desires to calculate the population of a separate sector. The method has the decided advantage of being simple and re quiring very few computations. However, on the other hand, it suffers from a disadvantage that in some countries constitutes a serious impediment to its use: It requires data that call for a high ly-developed system of registration of births and deaths where de ficiencies of registration are small and quantitatively known; only in this way is it possible to make the necessary corrections in the calculations to assure results that will have the desired use value and significance.

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The vital statistics method of population estimates is especial ly useful when the greater community encompassing the sectors or areas whose population it is desired to determine for a given cur rent date is going through a stage of development capable of pro voking very intensive internal migratory movements that are dif ficult to measure or register by other means. Such is the present case of the Puerto Rican community and that of many areas in the United States of America. The excellent results already ob tained in many localities through the use of this method, since it was first suggested in 1950 by demographer Donald C. Bogue of the University of Chicago, has made it gain increasing currency. Its efficacy has been demonstrated wherever it has been put to the test. The effectiveness of the method rests largely on data accu mulated up to the present with respect to births and deaths in vari ous regions or countries of the world. It is evident that the number of births and deaths in any community each year bears a close relationship to the size of its population. However, the same re lationship does not hold true with respect to the corresponding rates of birth and mortality used to express, although rather rough ly, the probability of births and deaths in a community in terms of a unit of time which almost always is the natural or calendar year, although sometimes the fiscal year is used. Owing to the practice of relating births and deaths to the pop ulation from which they derive, birth and mortality rates have come to be relatively stable statistics. Here fluctuations are no longer a reflection of a variation in the size of the corresponding population, but of certain conditions in the community which, ex cept on very rare occasions, change only gradually and at long term. Particularly worthy of note among these last-mentioned conditions are standards of living and cultural patterns of the community, levels of income and of education or schooling of the inhabitants, etc. Any substantial change observed in one of these factors or conditions in one sector of a country almost always proves to be the result of some similar change in the situation of the state or country to which the sector belongs. In other words. barring the marked fluctuations that may occasionally be caused in the rate of births or deaths in a certain sector by local calam ities such as epidemics, earthquakes, hurricanes, etc., chronological trends in mortality and birth rates in any sector of a greater com munity reflect characterics which are jnore typical of a gradual development than of an abrupt or oscillatory trend. Furthermore, they follow a course which as a general rule is decidedly parallel to that of the corresponding trends in the greater community of which the sector forms a part. Now then, migratory movements can acquire a level of in tensity at a given moment that will induce a comparatively abrupt

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degree of change in the age and sex distribution of the popula tion. (This distribution, of course, figures among the conditions or factors affecting the general mortality or birth pattern.) Migra tory movements exercise a marked effect on populations in certain stages of historical development. This fact should warn us of the danger of putting too much faith in the vital statistics method when calculating the population of regions or sectors of a coun try unless some circumstance exists that can be taken advantage of to solve the problem arising from migratory movements -when they reach a certain degree of intensity. That circumstance does indeed exist, as we shall outline immediately below. It is a well-known fact that the age groups characterized by the highest birth rate per unit of population — that is to say, the so-called reproductive ages — are precisely those where mortality is relatively low. Contrariwise, mortality is relatively high in the two groups at either end of the age scale within the internal limits of which the reproductive ages are enclosed. The highest numer ical expression of mortality occurs both at the end of the scale that marks the beginning of life at age O and at the opposite end com prising age levels that can be determined only in terms of the probabilities of survival of the very few' individuals who live that long. This pattern of relationship between births and deaths by age groups is universal, irrespective of the degree of development of the community under study. While it is true that the community’s development does affect the levels of magnitude of both phenomena in the different age groups, this influence is not necessarily reflected in a marked alteration of the birth and death ratio pattern that we have just described. As is to be expected, these levels are much higher in less developed communities than in the more de veloped ones. Nonetheless, in all of them births are most numer ous at ages in which mortality is very close to its minimum level. Throughout the reproductive stage the mortality rale in the cor responding age groups varies only slightly from one group to an other and tends to remain within an order of magnitude that we may consider relatively low, as eloquently demonstrated by Graph 4. Although this graph refers to feminine experience, masculine experience would show a similar pattern. Thus w’e can take advantage of the circumstance just discus sed for current population estimates of a region or sector of a given country, provided we have access to reasonably reliable data regard ing total population, births and deaths as of the date for which the estimate is desired. This would be done by using the com bined birth and death experience in such way that the influence of a possible migratory flow on one of the two phenomena would be compensated by that exerted on the other.

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107

The procedure for formulating the estimates in this case would be as follows: (1) An adequate period is chosen that will permit a satisfac tory analysis of the relationship between the phenomena of births and deaths occurring both in the sector or sec tors for which a population estimate is desired and in the larger area of the parent state or country. For this opera tion it is preferable to call on the experience of more than a year. Wherever possible, the experience of three consecutive years is used in general practice, with the middle year corresponding to the census year closest to the date for which the estimate is desired. (2) From reports from the corresponding demographic or civil registries, information is obtained on the number of births and deaths among the residents of the sectors that are the object of the estimate, as well as among the res idents of the total area of the state or country to which these sectors belong. (3) These figures are corrected for possible registration de ficiencies, as ascertained through special studies. This is done with respect to sectors for which the estimate is intended and for the country in general as well, since the margin of error varies from one area to another, at times to a very considerable extent. (4) If the data corresponding to the census taken in the mid dle year of the period chosen are for a date close to the first of July of that year (which would mark the central point for the entire period), such data can be used direct ly in the computations. However, if the census was taken at the beginning or end of that year, it would be advis able to adjust the census figures somewhat in order to obtain reasonable estimates of the population as of July 1. This can be done by using any of the appropriate methods described in this paper. As a general rule, it would be well to choose one of the more simple pro cedures outlined here for an estimate covering a date so close to the census date. (5) On the basis of the data collected through the procedures described in the foregoing steps, the gross rates of birth and mortality corresponding to the sector or sectors in involved and for the parent state or country are calculated on an annual base for the three-year period. This opera tion woidd be done simply by dividing separately by three the births and deaths accumulated during the three-year period in each of the sectors and in the state or country to which these belong. This will give us the annual aver age of births or deaths during the three-year period in

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PROCEEDINGS ECONOMIC PLANNING SEMINAR each of the places mentioned. The next step is to divide the result of this operation by the corresponding popula tion estimate. The result of this division is generally multiplied by 1,000 so that the rate may be expressed in terms of each 1,000 inhabitants. (6) Next it is necessary to determine the ratio between the gross mortality rate of each region for which a popula tion estimate is desired and that of the parent state or country. (7) The foregoing step is repeated in the case of gross birth rates. (8) If possible, the behavior of these gross rates and ratios is studied chronologically throughout a series of censuses or on the basis of other appropriate information. The re lationship between the gross rates of birth and mortality of a region and those of the state or country to which it belongs may show some tendency toward change. If so, some factor of correction should be computed and applied to the ratios obtained on the basis of the most recent experience, before proceeding to use them for purposes of the desired estimate. (9) On the basis of pertinent vital statistics, gross mortality and birth rates are calculated for the state or country of which the sector or region whose population is to be estimated forms a part. This operation is performed for the year incorporating the date of the estimate. (10) The gross rates are then multiplied by the appropriate ratio computed for the area or sector which is the object of the estimate, in order to calculate its gross birth and mortality rates for the base year. (11) After allowing for registration deficiencies (when this is feasible), the gross rate estimated in the above fashion for the area or sector involved is divided by the number of deaths registered there. (12) The same procedure is repeated for births. The last two steps produce two independent estimates of the popula tion of the area: (a) one based on births; and (b) one based on deaths. (13) A single estimate is obtained by taking the arithmetic average of the two. (14) If the population for the remaining regions which make up the stale or country has been calculated in the same way, the results are pro-rated in order that their sum will be equal to the (presumably known) total popula tion of the state or country.

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The method just described is highly flexible, and admits of various modifications that may be suggested by experience or special knowledge with respect to a series of pertinent factors exist ing in the areas or regions for which the estimate is being made or in the parent state or country. This procedure can be employed to calculate the population by age and sex groups. In this instance one would work on exact ly the same principle outlined above, substituting birth and mor tality rates by age and sex for the gross rates corresponding to these phenomena. However, attention should be called to the fact that when making this refinement one may find that the numbers involved in the calculation covering certain of the groups are so small as to cast doubt on the reliability of the results. In these cases other data on the community are ordinarily resorted to such as school enrollment, number of beneficiaries of certain services, etc., which can help materially in overcoming these difficulties. (7) Pro-Rata Method The pro rata method is generally used when an estimate of the total population of a community on a given date is available but there is no breakdown by certain important attributes that must be taken into consideration for purposes of special studies, planning, etc. In these cases the method provides a simple means of break ing down the total population in accordance with those attribute classifications. When pro-rating population figures, advantage is taken of data furnished by the censuses carried out to date in the community; the most weight, of course, is accorded to the most recent one. The first step in applying the method consists of studying the relative magnitude of the groups which compose the total pop ulation as classified within each category of the attribute or at tributes under study. On the basis of these data, one can then proceed to break down the corresponding estimate, preferably taking into consideration any relative group size trends that show up in the entire course of the censuses studied. However, if the estimated breakdown corresponds to a date quite near the census date, the calculation can be based satisfactorily on the data contributed by that census alone, without having recourse to any other whatsoever. Nonetheless, the pro rata method should be used with caution, for reasons which we believe to be self-explanatory for the most part. In some cases its applications can lead one to overlook sub stantial changes in the by-attribute breakdown of the population. which on many occasions could have at least been suspected through study or observation of certain events in the community complete ly unconnected with the base censuses. The present case of the Puerto Rican community should serve by way of an adequate ex-

lio

proceedings economic planning seminar

arnple to substantiate this warning. It would be hazardous to esti mate the age and sex breakdown of the present Puerto Rican pop ulation by applying the results of the last census (April 1, 1950) ln Pr°-rating whatever total population estimate may be available or a current date. This is due to the fact that in recent years the migratory movement between Puerto Rico and other areas has taken on changing characteristics in addition to being substantialy greater than it was at any earlier stage in the present century. As a consequence, the island has been losing a substantial num“er of inhabitants annually — for the most part men falling withm certain age groups that include, logically enough, those who are the most capable from the standpoint of production as well as re production. Therefore, if we were to estimate the age and sex breakdown of the present population by applying the ratio cor responding to each group in the 1950 census to an estimate of the total current population we would be using data which no longer reflect reality. However, because of its simplicity the pro rata method may be extremely useful for this type of estimate when there is no evidence of events or marked changes in the rate of certain activities of the population that mightL exert an appreeiable :mfluence on the demographic ’ ... characteristics under study. This was the case in Puerto Rico prior to 1950. (8) Method of Components The components method of calculating the population takes into consideration the individual contribution of each factor whose direct influence is responsible, ultimately, for the number of in habitants in a community as well as their distribution by age and sex. These factors are none other than births, deaths, and mi gratory movements. When this method is used in calculating the population at cur rent dates, the operations required differ considerably from those applied when future dates (projection) are involved. For this rea son we will outline first how the method is used for current pop ulation estimates and then will proceed to an explanation of its ap plication to future-date calculations.

a. Calculation of the population as of current dates The discussion of the use of the method of components in estimating the population for current dates can be approached from different angles. However, for purposes of ease of explanation we have chosen the graphic method. Let us begin by choosing two rectangular axes or coordinates that we will call OX and OY, and which have as their origin the point of intersection O. OX is the horizontal axis or abscissa, and

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OY, the vertical axis or ordinate. Both axes are divided in equal scales measured in terms of the same time unit. The age of in dividuals will be indicated on the OX axis, and chronological time on the OY axis (see Figure 1).

AGE

Figure I

Using these coordinates as lines of reference we can visualize the life of an individual as a line parallel to OX. Measured on the chronological time scale the displacement of that line in relation to the OX axis will indicate the date of entry of the individual into the population under study. If the life line begins on the OY axis and the age scale starts at age 0, this means that the in dividual represented by that line entered the community at age zero and, therefore, was born there. If, on the contrary, the life line begins at some point toward the right of the OY axis, but not on it, this means that the individual entered the population under study by immigration at the age and on the date indicated by the position in relation to the coordinates of the point that marks the origin of his life line.

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In like fashion, the point which marks the termination of each life line indicates the age at which the individual represented abandoned the population under study, either by emigration or death. The date on which this happens can be read by drawing a diagonal through that point and joining the two coordinates at points equidistant from the origin in terms of the time unit which has been used to express both scales. The various life lines shown in Figure 2 will illustrate what we have just said.

Here we have John, born January 1, 1953, and who died or emigrated January 1, 1957. at exactly 4 years of age. Then we have Louis, who was born July 1, 1951, and died or emigrated October 1, 1952, at exactly one year and three months of age. And finally, there is Daniel who was born elsewhere and came to the community under demographic study on July 1. 1955, at the exact age of 5-1/2 years, and died or emigrated October 1, 1957, when he was exactly seven years and nine months old.

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Thus we can represent each individual by a point which, as it moves from left to right and parallel to the age scale, generates a life line. In this way, if we wanted to know what part of the population is N years of age on a given date, it would be sufficient to determine how many of those points in movement, generating life lines, touch on the precise date the segment of the correspond ing diagonal that indicates the individuals of that age. Thus, in Figure 3 the lines which as of January 1, 1953 touch segment GH of the diagonal representing that date (lines B. C and D) indicate the individuals who in the population under study were at that moment anywhere from exactly one year and nine months to two years and nine months old. As shown by Figure 3, the complete diagonal of which GH is a segment indicates not only the popula tion of exactly 3-1/2 years of age but also all inhabitants who are younger.

In general terms we may say, then, that the diagonals that join points equidistant from the origin or the two axes or scales

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indicate, as of the date they intercept the chronological scale, all the persons whose age is between the age used as the origin and the age intercepted by the diagonals on the age axis. Thus, in Figure 4 diagonal PQ indicates the population exactly three years of age or younger as of January 1, 1955.

To designate a time interval in this system of coordinates, one needs only to draw two parallel diagonals, one of which would have as its origin the point on the chronological scale which marks the beginning of the interval, and the other, the point that marks the end. The points intercepted by these diagonals on the age scale would be as far away from the origin of the coordinates and in terms of the unit of time used as the respective dates chosen as the starting points for drawing the diagonals.

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Thus, for example, the interval between January 1, 1952 and January 1, 1954, is represented in Figure 5 by the space between diagonals AB and CD.

To indicate the entries and exits of migrants as well as deaths which may have affected a given age group within a fixed time interval one has only to construct a parallelogram using the two diagonals marking the limits of the interval and drawn in the manner already indicated and the two vertical lines designating the limits of the age group involved. Thus, in Figure 6 parallelogram ABCD covers deaths or migratory movements, as the case may be, among one-year-old individuals (exactly one year of age or more, but less than two) during the period from January 1, 1951, to January 1, 1953. The types of lines and figures that are of the most interest in a graph of this nature for purposes of making population estimates at current dates by the method of components can be more fully appreciated from a careful study of Figure 7. The following paragraphs interpret these lines and figures: (1) Line AB denotes the child population exactly three years old, or less, as of January 1, 1952.

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Line GH denotes the child population exactly four years of age, or less, as of January 1, 1953. (3) Segment CD of line AB denotes the population that was one year old as of January 1, 1952 — that is, from the exact age of one year up to, hut not including, the exact age of two years. (4) Segment EF of line GH in the same manner denotes the one-year-old population as of January 1, 1953. (5) Parallelogram CDEF designates the persons one year of age who died, emigrated or immigrated, as the case may be, during the year 1952. If we observe parallelogram CDEF carefully, an item of in formation shows up which is very curious and highly important for the discussion that follows: The parallelogram referred to includes persons born in 1951 as well as those born during 1950. If we break down that parallelogram into the two equal triangles indicated in Figure 7 (CEF and CDF) we will note that the persons one year old who died, emigrated or immigrated during

(2)

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1952 and whose corresponding life lines end or begin within the limits of triangle CEF, were all born in 1951. However, those corresponding to the other triangle of equal area or size which with the former forms parallelogram CDEF (triangle CDG) were born in 1950. This fact should be clearly understood since it is of fundamental importance in the application of the procedures explained hereinafter. IIow to estimate the population Keeping in mind the foregoing discussion, it is readily ap parent that to estimate the population of X age on a given date by this procedure, all one has to do is simply see how many life lines intercept the segment of the diagonal indicating the desired age and date. The first step consists of constructing a graph similar to those already described. However, before doing this it is necessary to determine what date and age should be chosen as the origin of the coordinates. In the case of ages from zero (that is, birth)

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to one year less than the number of years of difference between the date of the estimate to be made and that of the base estimate or census, the origin should be fixed at the minimum at a date as many years prior to the date of the proposed estimate as the number of years constituting said difference. The following three examples will illustrate this part of the discussion: First example: We want to estimate the population as of July 1, 1954. The estimate or census which is to be used as the base for these purposes corresponds to April, 1, 1950. The difference between the date of the estimate to be made and that of the base estimate or census is, therefore, four years and three months. Following the instructions, July 1, 1950 could be chosen as the origin for estimating the population up to any age less than precisely four years. However, to estimate the popula tion up to exactly five years of age it would be necessary to move the origin at least as far back as July 1, 1949

(see Figure 8).

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Second example: We need to estimate the population as of January 1, 1956, using as the base the population corresponding to April 1, 1950, as in the previous ex ample. The difference between the two dates is now 5 years and 9 months. The origin in this case for the calculation of the population up to four years of age (that is, less than five years of age) should be set at January 1, 1951, or an earlier date. (See Figure 9.)

From that age forward the only precaution that must be taken is to be sure that the diagonal used to denote the base estimate or last census makes allowance for the population’s growing as many years older as there are years in the interval between the date of the base estimate or census and that of the proposed estimate, and that the diagonal corresponding to the date for which the estimate is going to be made covers as a minimum the most ad vanced age to be estimated. Thus, if the base calcula-

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tion used corresponds to July 1, 1955 and an estimate is to be made as of April 1, 1956, to calculate the popula tion from 27 to 28 years of age the diagonal denoting the base year should cover from the age of 26 years, and the diagonal of the year to be estimated should cover at least up to the age of 28 years (that is, up to but not including exactly 29 years —■ see Figure 10).

AGE IN YEARS

1 Apr 1 Apr

Third example: If the base estimate is for July 1, 1952, and the estimate to be made is for January 1, 1955, to estimate the 53-year-old population the diagonal that represents the base year or last census must obviously cover from the age of 50 years. The diagonal denoting the estimate to be made must extend, as a minimum, to the age of 54 years exactly (see Figure 11).

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For a better understanding of the application of the components method to the calculation of the population at current dates, let us follow a specific example through the complete process, based on the following problem: Problem.-. We need to estimate the population of Puerto Rico by age and sex as of July 1, 1958, taking the estimate corresponding to July 1, 1957 as the base. In the graph for the computation of the population Jess than a year of age (see Figure 12) July 1, 1952, is taken as the origin. since the migratory movements that could have affected those younger than one year of age are included within the 0-4 years age group in official data available for these purposes. In the above graph segment AB indicates the births in the community during the period July 1. 1957 to July 1, 1958. Triangle ABC represents deaths and net migra tion during that period among those born during the in terval between the above-indicated dates. From the births during this period (duly corrected for registration errors

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or omissions) let us subtract the deaths among persons of that group whose year of birth fell within the period between July 1, 1957 and July 1, 1958 (triangle ABC of parallelogram ABCD). Next we add algebraically the net balance of the migratory movement among the in dividuals having identical birth dates (triangle ABC of parallelogram ABEF). The result is the desired popula tion less than one year of age as of July 1, 1958. In the particular case of persons less than a year of age we should point out a situation which obliges us to follow a special procedure for this age group which is not applicable in the case of the remainder.

A well-known natural phenomenon is that mortality risks during the first year of life vary rapidly and substantially throughout the period, becoming less in the measure that the child’s age moves farther and farther from the date of birth. That is to say, the risks of mortality of newborn infants diminish

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m E B V A L MONTHS

rapidly as the flow of time brings them nearer to their first birth day. It is for this reason that in this particular case parallelogram ABCD which shows the deaths of children less than a year of age in a given period of time (from July 1, 1957 to July 1, 1958) cannot be divided into two equal-area triangles denoting an equal proportion of deaths (see Figure 12). To solve this difficulty it is necessary to compute a series of separation factors by subdivi sions of the first year of life (as has been done in Puerto Rico in the example we are discussing). By this means we derive the proportion of deaths of children less than a year of age which really correspond to each of the two triangles comprising the parallelogram denoting the deaths of children less than one year of age during a given interval. This is precisely the separation factor that we need and that we shall call /. Calculation of the Separation Factor The procedure for computing this factor is illustrated below: We need to calculate separation factor j for the deaths of chil-

PROCEEDINGS ECONOMIC PLANNING SEMINAR

Children who died in:

Proportion of children who died in the same year for their birth:

Number of children who died in the same year of their birth:

TABLE 1 COMPUTATION OF SEPARATION FACTOR (/) FOR CHILDREN LESS THAN ONE YEAR OF AGE WHO DIED IN PUERTO RICO DURING YEARS 1951 AND 1953. Age at death:

1951 1953 1951 1953 (Í) (4) (5) (6) (3) (2) (1) 590 603 0.99861 604 1 Day 591 0.99583 188 206 207 1 Day 189 212 173 0.99306 174 213 2 Days 0.99028 171 155 157 173 3 Days 0.98750 106 112 113 107 4 Days l> I 0.98472 87 88 5 Days 88 0.98191. 61 74 75 65 6 Days 3 >7 0.97083 266 274 347 7 - 13 Days 0.95139 227 216 227 14 - 20 Days 239 135 0.93191. 136 145 21-27 Days 146 435 0.87778 442 504 553 28 - 59 Days 0.79167 397 306 387 501 2 Months 0.70833 289 231 408 326 3 Months 0.62500 221 187 354 299 4 Months 0.54167 174 321 241 131 5 Months 0.45833 130 112 283 244 6 Months 0.37500 96 255 225 84 7 Months 0.29167 76 259 53 8 Months 183 40 0.20833 192 162 34 9 Months 0.12500 24 192 17 10 Months 135 0.04167 7 5 160 127 11 Months 4056 5635 TOTAL: 4898 3630 Separation Factor (Í) for children less than one year of age in 1951 = Total Column 5 = 4056 — 0.720

Total Column 3

4898

Total Column 2 5635 Separation Factor (f) for children less than one year of age in 1953 = Total Column 6 = 3630 — 0.741

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125

dren less than one year old which occurred during the period of a year. The first step consists in subdividing the corresponding paral lelogram, illustrated in Figure 13, in accordance with the subdivi sions of the first year of life used in the compilation of mortality data on children in the community who are less than one year old. lhen we proceed to calculate what part of each of the small paral lelograms which are thus formed contains the deaths which oc curred among children born within the interval studied — in Figure 13 these portions are indicated by the continuous black lines — and what parts correspond to children born before that interval. In Figure 13 this is equivalent to determining what proportion of the area of the different parallelograms is represented by the sections drawn in continuous black lines. In other words, it means deter mining what proportion HJIG represents of parallelogram (FF) (GG) JH, and so on. These proportions have been determined for the subdivision of the first year of life used in Puerto Rico and are indicated in Column 4 of Table 1. Once these proportions are known, the fol lowing step consists in multiplying the deaths which took place dur ing one year within each subdivision of the first year of life by the corresponding proportion. Using Table 1 as an example, we sec that entries in columns 2 and 3 are multiplied individually by the corresponding entries in column 4. The results of this opera tion arc then read from the corresponding entries in columns 5 and 6 of the same table. The sum of the deaths in column 5. divided by the total deaths of children less than one year of age. shown in column 2, will give us the separation factor for the deaths of chil dren less than one year of age which occurred in Puerto Rico dur ing the year 1951. In the same manner, by repeating the opera tion just described with respect to columns 6 and 3. we obtain the separation factor for the deaths of children less than one year of age which occurred during the course of the year 1953. In both cases the separation factors have been calculated for an interval of precisely one year‘s duration. However, at times it is necessary to make population estimates for periods of one month, one quarter, etc. In these instances the separation factors must be computed for intervals of less than one year. For this purpose one follows precisely the same pro cedure just described, making the necessary modifications in the graphic analysis presented above with respect to the death of chil dren less than one year old and in keeping with the foregoing dis cussion. A scries of separation factors for deaths of children less than one year old in Puerto Rico have been calculated for time inter vals of less than one year. These factors are presented in Table 2. There we sec that if the difference between the dale of the base

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estimate and the estimate to be made is one month, the correspond ing separation factor (f) for 1953 is equal to 0.33. If that dif ference is three months, separation factor (f) for 1952 is equal to 0.44, and so on. In summary, this table gives us for any time interval between one and twelve months (one year) that may separate the date of the base estimate from that of the estimate to be made, the cor responding separation factors calculated in keeping with Puerto Ri can experience in the years from 1950 to 1953. An interesting fact which we should point out with respect to these tables is that the factors do not tend to vary abruptly from one year to the next and, therefore, once they are computed for a given period, no great risk would be involved if one were to continue to use them for subsequent years. Nevertheless, it is advisable to make period ic revisions of these factors, particularly if at any given moment there is reason to suspect that the conditions which affect infant mortality have undergone a marked deviation from the pattern prevailing up to that time.

T A B L E

Separation Factors for Deaths of Children Less Than One Year of Age in Puerto Rico during the Time Intervals Indicated: Years 1950 - 1953. Interval between Base Date and Date of Estimate.

1950

1951

1952

1953

1 month 2 months 3 4 5 6 »» 7 8 »» 9 10 Í5 11 J, 12 J,

.31 .38 .43 .47 .52 .55 .59 .62 .65 .68 .70 .72

.30 .36 .42 .46 .51 .54 .58 .61 .64 .67 .69 .72

.32 .39 .44 .49 .53 .56 .60 .63 .65 .68 .70 .73

.33 .40 .45 .50 .54 .57 .61 .64 .67 .69 .72 .74

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f- 1 1 month 2 months 3 9> 4 99 5 99 6 99 7 99 8 99 9 99 10 99 11 99 12 99

.69 .62 .57 .53 .48 .45 .41 .38 .35 .32 .30 .28

.70 .64 .58 .54 .49 .46 .42 .39 .36 .33 .31 .28

.68 .61 .56 .51 .47 .44 .40 .37 .35 .32 .30 .27

.67 .60 .55 .50 .46 .43 .39 .36 .33 .31 .28 .26

The phenomenon just described regarding mortality in the Ie=sthan-one-year-old population, however, does not apply with respect to migratory movements which can affect that age group. Thus we can reasonably consider migrants of any age or age group as being un iformly distributed among all the subdivisions of said ages, whatever the period of time chosen. Taking into account the explanation up to this point, let us proceed to illustrate the computation of the population of less than one year of age as of July 1, 1958, using actual data on Puerto Rico. Tables 3, 4 and 5 furnish the basic information necessary for the compulations. Going on to Table 6, let us analyze the columns corresponding to males. The figures that appear in those columns, representing the estimated population under one year of age, are obtained in the manner outlined below. Births during the period

38158

AB in Figure 12

Correction factor to allow for omissions in registration data 1’0^ Corrected births (38158) x (1.04) = 39684 Deaths of children less than one year old*

2278 • Tiiis figure is not corrected for omissions in registration because death records in Puerto Rico are considered to be complete for all practical purposes.

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DEATHS.

Puerto Rico: Fiscal Year 1957 - 1958 AGE GROUP

(in years) O 1 - 4 5 - 9 10 - 14 15 - 19 20 - 24 25 - 29 30 - 34 35 - 39 40 - 44 45 - 49 50 - 54 55 - 59 60 - 64 65 - 69 70 - 74 75 + Not specified All ages

MALES

FEMALES

BOTH SEXES

2278 516 162 124 135 157 139 164 209 244 318 372 401 487 725 709 1705 11 8,856

1812 512 136 73 79 111 113 138 210 204. 246 254 269 359 485 487 2106 1 7,595

4090 1028 298 197 214 268 252 302 419 448 564 626 670 816 1210 1196 3811 12 16,451

TABLE

BIRTHS REGISTERED IN PUERTO RICO

Fiscal Year 1957 - 58 MALES - 38158 FEMALES - 36411 BOTH SEXES - 74569

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TABLE 5 MIGRATORY MOVEMENT Fiscal Year 1957 - 1958 Entries Departures

Balance

MALES Age groups in years 0 - 4 5 - 9 10 - 14 15 - 19 20 - 24 25 - 29 30 - 34 35 - 39 40 - 44 45 - 49 50 - 54 55 - 59 60 - 64 65 - 69 70 - 74. 75 4-

13942 8233 6182 12627 35928 33298 30002 27590 24671 21033 15716 9473 6052 3973 1813 884

11695 8772 7907 27038 47217 35950 31704 29301 23759 19772 16000 8704 5892 3604 1409 696

All ages

251417

279120

28003

FEMALES Age groups in years 0 - 4 5 - 9 10 - 14 15 - 19 20 ■ 24. 25 - 29 30 - 34. 35 • 39 40 - 44 45 - 49 50 - 54 55 - 59 60 - 64 65 - 69 70 - 74 75 +

11553 8053 8151 14076 24992 27930 22970 19159 12992 12157 9223 6639 5612 4207 1095 905

9879 7481 8173 20609 32248 26251 20503 17985 11757 10921 8538 5674. 4679 2101 877 582

1671 569 278 6533 7256 1676 2467 1474 1235 1536 685 965 933 1803 218 323

All ages

190611

188567

— — — — — — — —

— —

2217 539 1725 14-111 11289 2652 1702 1711 912 1261 284 769 160 369 404 188

2017

PROCEEDINGS ECONOMIC PLANNING SEMINAR Population Population Deaths Deaths Migration POPULATION

Births Deaths Migration POPULATION

5-9

1-4

COMPONENTS.

Population Population Deaths Deaths Migration Migration POPULATION

POPULATION 75 +

Population Population Deaths Migration Deaths Migration

Age group

0 0-4 Years 0 1-4 0 1-4 0-4 Years 1-4 5-9 1-4 5-9 0-4 5-9 Years

TABLE 6

FACTOR (c)

ESTIMATED CIVILIAN POPULATION 7/1/58 FEMALES (b)

MALES (a)

—

1.04 (f)- -77 .10

—

36411 1812 1674

38158 2278 2247

— —

ESTIMATED POPULATION

MALES FEMALES (d) (e) (b) x (c) (a) x (c) 39684 37867 1754 — 1395 225 167 38155 36639

37218 101536 — 417 — 448 1339 142228

1.00 .75 (l-f) .23 — .875 — .80

38767 106575 524. 452 1798 146164

37218 139381 1812 512 1671

34845 125279 — 64 — 122 167 512 160617

38767 142100 2278 — 516 — 2247

35525 128258 64 146 225 485 163313

2716 21475 — 49 22 — 2107 323 22380

— —

.25 .80 .125 — .90 — .10 .90 —

2878 18271 71 40 1716 188 19590

— —

•

.20 1.00 .10 — .10 1.00 — 1.00

139381 156599 512 136 1674 569

14392 18271 709 — 404 1716 — 188

13580 21475 487 218 2107 323

142100 160323 516 162 2247 539 —

70-74 75 70-74 — 70-74 75 + —

75 +

POPULATION CALCULATION METHODS

Deaths of children less than one year old which occurred among births represented by AB (2278) x (f) = (2278) x (.77) = 1754

Net migration, 0-4 years of age . ........

+ 2247 ..........

Net migration among births indicated by AB . ........ (1/10)

131

Triangle ABC in Figure 12

Parallelogram ABEF in Figure 12. The + sign indicates a bal ance in favor of im migration.

x (2247) = + 225 Triangle ABC = 1/10 of parallelogram ABEF, Figure 12.

In summary:

+ 39684 — 1754 + 225 38155 == population of children less than one year of age as of July 1, 1958 Let us proceed to calculate the population of children from 1 ■ 4 years of age. In figure 14, segment AB represents the pop ulation from 1.4 years of age as of July 1, 1958. The origin of this group with respect to the base “progenitive” population can be established easily in the following manner: In terms of the base estimate, the group comes from the pop ulation which on that dale was less than one year old, and from part of those who were between 1 and 4 years old (segments CD and DF, respectively, in Figure 14). The next step is to determine ■what part of the population represented by segment DF is that which contributes to the population from 1 - 4 years of age the follow ing year. Obviously, from Figure 14 we can prove that 3/4 of DF represents those who contribute to form the group whose num ber or size we are interested in determining. These 3/4 parts of DF are presented by segment DE in the same figure. In summary, and making use of the corresponding data ob tained from Table 6: CD = 38767 DF — 142100 3/4 DF — 106575

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MS X3 YBAHS.

«1 P»

However, we have not yet considered the fact that the popu lation represented by segment CE in Figure 1 1 was undoubtedly affected by mortality and migration during that year. Mortality was responsible for the fact that during that period the population represented by segment CE declined in a proportion ecpial to (1 - f) of the deaths of children less than one year old. or (1 - f) of parallelogram ADCG. and in a proportion of 7/8 of the deaths within the group from 1 - 1 years of age — that is. 7/8 of paral lelogram DÁFB in Figure 1 I. The effect of migration was as follows: Of the net migration among the individuals from 0 - I years of age (that is lo say, less than 5 years old I during the period be tween July 1, 1957 and July 1. 1958. 8/1(1 came from the “pro genitor” (i. e., originator) group of the population we desire to estimate, represented in Figure 11 by segment CE. With this explanation we can then proceed to calculate the pop ulation of males 1 - 4 years of age as of July 1, 1958, by em ploying the following procedure:

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Population 0 = 38767 CD in Figure 14 3/4 of the population from 1 - 4 years of age = 106575 DE

(1 - 1) deaths of children less than one year old — 0.23 (2278) — 524 Triangle CDA 7/8 of the deaths from 1 - 4 years = .875 (516) = 452 DAEB in Figure 14 8/10 of the net migration from 0 - 4 years = .8

(2274) = 1798 ACEB in Figure 14

Grouping the results of the foregoing steps, and adding them al gebraically, we have: + 38767 + 106575 — 524 — 452 + 1798

146164 = population from 1 - 4 years of age on the date of the estimate Let us proceed now to estimate the popidation from 5 - 9 years of age. Making reference to Figure 15, the procedure would be as follows: The population 5 - 9 years of age as of July 1, 1958 is repre sented in Figure 15 by diagonal segment AB. Projecting this pop ulation retrospectively one year we see that the originator popida tion corresponds to diagonal segment CD. Now then, CD is com posed of segment CF (which is equal to 1/4 of segment EF rep resenting the population from 1- 4 years of age as of July 1. 1957) and 4/5 of segment FG (representing the population 5-9 years of age as of July 1, 1957). Referring now' to the corresponding figures in Table 6, we may say that the originator population is composed of: 1/4 EF = 1/4 (142100) = 35525 4/5 FG = 4/5 (160323) = 128258 Let us now examine the deaths which affected that originator population during the period. Observe the parallelogram which comprises the deaths of persons 1 - 4 years of age during the period. Only 1/8 of those deaths occurred among individuals denoted by segment CD. These deaths are represented by triangle ACF. Of the deaths of persons from 5 - 9 years of age which occurred during

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the period (represented by parallelogram ABFG in Figure 15) 9/10 corresponded to individuals coming from originator segment CD. In summary, and using the corresponding figures from Table

6: 1/8 of parallelogram EHFA = 1/8 (516) = 64 9/10 of parallelogram ABFG = 9/10 (162) = 146 Let us now work with the component of migration. From par allelogram AIJF, which represents net migration of individuals from 0 - 4 years of age during the period, we find that 1/10 came from the group of individuals represented by segment CD. Of the net migration during the same period of individuals from 5 - 9 years of age (parallelogram AFGB), 9/10 came from the originator population represented by segment CD. Using the appropriate in formation taken from Table 6, we can summarize as follows the effects of the migration component on the growth of this group: 1/10 of parallelogram AIJF = 1/10 (2247) = -|- 225 9/10 of parallelogram ABFG = 9/10 (-539#) = — 485

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Having in this way obtained all the necessary information, one then proceeds to add algebraically the amounts contributed by the various components to the formation of the population group of males 5 - 9 years of age as of July 1, 1958. This last operation is shown in detail below:

+ + — — + —

35525 128258 64 146 225 485 163313 = population of males 5 - 9 years of age

To calculate the population in subsequent age groups the me thod used is basically the same. The example explained step by step hereinafter can be applied to the population estimate for any similar group between the ages of 10 - 74 years. To extend its application to all groups falling within those two age limits the example is developed by using letter X to designate the age that marks the lower limit of the age group whose population is being estimated and letter Y, to designate the exact date of the base estimate or census (Figure 16A). In other words, if the population to be estimated were that of 10 - 14 years of age on July 1, 1958, and the population cor responding to July 1, 1957, were used as the base, X would be equal to 10 years, Y would represent July 1, 1957, Y + 1 would mean July 1, 1958, and Figure 16A would become Figure 16B.

Continuing the discussion in the general terms outlined initial ly in this case, the base population required for the estimate would be composed as follows:

1/5 of the population of (x - 5) to (x) years 4/5 of the population of (x) to (x + 5) years This is illustrated in Figure 16A.

We see there that 1/5 of AC is indicated by segment BC and 4/5 of CE is indicated by segment CD. Next we proceed to calculate the individual contribution of # The minus sign indicates that the net migration figures express a loss in the population: i. e., the number of emigrants of those ages exceeded the number of immigrants.

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PROCEEDINGS ECONOMIC PLANNING SEMINAR

each of the components which would have affected the originator population BD during the course of a year. (1) Deaths —

1/10 of the deaths of (x - 5) to (x) years of age (triangle BCG in Figure 16A, which con stitutes 1/10 of parallelogram AFCG), and 9/10 of the deaths in age group (x) to (x + 5) years (quadrilateral CGDH which is equivalent to 9/10 of parallelogram CGEH). (2) Net migration:

Using the same figure, we see that the contribution of this component would be the algebraic sum of 1/10 of the net migration of (x) to (x - 5) years of age (represented in Figure 16A by triangle BCG

POPULATION CALCULATION METHODS

137

which is 1/10 of parallelogram AFCG) and 9/10 of the net migration of individuals from (x) to (x + 5) years old (represented in Figure 16A by quadrilateral CGDH which is 9/10 of parallelogram CGEH). The signs of these two sums are of great importance and will depend, of course, on whether the correspond ing net balance is in favor of emigration or immigra tion. The algebraic sum of the results of all these operations would then be that which would give us the population from (x) to (x + 5) years of age as of the date of the desired estimate. By way of a numerical illustration of the procedure just de scribed let us calculate for Puerto Rico the population from 10 -14 years of age as of July 1, 1958. The estimate corresponding to July 1, 1957, will be the base, and Table 7 will supply the remain ing necessary data: + .20 (base population from 5— 9 years) = -f32.065 + .80 (base population from 10—14 years) = + 116,033 —• .10 (deaths from 5 — 9 years) = — 16 —• .90 (deaths from 10 — 14 years) = — 112 + .10 (net migration from 5 — 9) years) = — 54 + .90 (net migration from 10 — 14 years) = — 1,552 Number of males 10—14 years old in Puerto Rico as of July 1, 1958

1-16,364

Finally, let us describe the method for estimating the popula tion in the open interval of 75 years or more, which although based on the same principles, is slightly different in its application from those previously discussed. For this purpose, let us refer to Table 6 and Figure 17. The base orginator population is composed of the total of in dividuals 75 years old or more, plus 1/5 of the population 70-74 years of age, which is represented by diagonal segment BC in Fieure 17. Deaths to be substracted would be the following:

(a)

1/10 of the deaths of individuals from 70 — 74 years of age (triangle BCD, which is 1/10 of parallelogram AECD).

(b) total deaths among individuals 75 years old or more. With respect to migration: (a) 1/10 of the net migration of individuals of 70 — 74 years of age (again, triangle BCD, Figure 17) is added or subtracted, depending on whether the net balance of

PROCEEDINGS ECONOMIC PLANNING SEMINAR 138

TABLE 7

(4)

(e)

(Í)

(«) .10 Migration x-5 to x

- 1552 - 12970 - 10160 - 2387 - 1532 - 1540 821 1135 - 256 692 144 332 364

143175 110707 85983 85262 81366 74391 63816 54137 42111 32453 24737 20148 14344

146364 99190 59316 52498 50711 55808 59140 57203 50321 43615 33219 22562 15364

(*)

Net Migration

- 54 - 172 - 1441 - 1129 - 265 - 170 - 171 91 126 - 28 // 16 37

250 - 5880 - 6530 1508 2220 1327 1112 1382 616 868 840 1623 196

.90 Deaths to x + 5

- 539 - 1725 - 14111 - 11289 - 2652 - 1702 - 1711 912 1261 - 28-1 769 160 369 404

57 28 — 653 - 726 168 247 147 124 154 68 96 93 180

Population 7/1/58 (c+d) (1 + g + I + j)

_ - 112 - 122 - 141 - 125 - 148 - 188 - 220 - 286 - 335 - 361 - 438 - 652 - 638

569 278 - 6533 - 7256 1676 2467 1474 1235 1536 685 965 933 1803 218

.90 Net Migration x to x + 5

- 66 - 71 - 100 - 102 - 124 - 189 - 184 — 221 - 229 — 242 - 323 - 436 - 438

(/«)

ESTIMATE OF CIVILIAN POPULATION: PUERTO RICO 7/1/58 (c)

- 16 - 12 - 14 - 16 - 14 - 16 - 21 - 24 - 32 - 37 - 40 ” Í9

.10 Deaths x - 5 to

- 162 - 124 - 135 - 157 - 139 - 164 - 209 - 244 - 318 - 372 - 401 - 487 - 725 - 709

Deaths

116033 83458 50207 43603 41769 47280 46911 44559 39678 33430 25118 16635 11514

- 8 - 11 - 11 - 14 - 21 - 20 - 25 - 25 — 27 - 36 - 48

- 14

- 136 - 73 - 79 - Ill - 113 - 138 - 210 - 204 - 246 - 254 - 269 - 359 - 485 - 487

.80 Population Age x to x * 5

111628 88730 71092 66820 62408 57418 48407 40770 31402 23933 18168 14362 10864

.20 Papulation Age x - 5 to X

32065 29008 20865 12552 10901 10442 11820 11728 11140 9919 8358 6280 4159

(a) (M Age Population group 7/1/57 (r to x + 5 years)

MALES 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74

31320 27907 22182 17773 16705 15602 14355 12102 10193 7851 5983 4542 3590

160323 145041 104323 62759 54504 52211 59100 58639 55699 49597 41788 31398 20794 14392

FEMALES 156599 5-9 139535 10-14 110912 15-19 88865 20-24 83525 25-29 78010 30-34 71773 35-39 60509 40-44 50963 45-49 39253 50-54 29916 55-59 22710 60-64 17952 65-69 13580 70-74

DEMAND FOR HUMAN RESOURCES IN PUERTO RICO

139

that movement is positive (immigration) or negative (emigration). (b) the net balance of total migration among individuals 75 years old or more is added or subtracted, depend ing on whether said balance is positive or negative. With the aid of the corresponding data taken from Table 6, let us proceed to illustrate the procedure numerically by estimating the male population 75 years old or older in Puerto Rico as of July 1, 1958. We will use as the base the July 1, 1957, estimate of this population group which also appears in that table: .20 (base population 70 — 74 years old) = + 2878 + 1.00 (base population 75 years old or more) = 18271 — .10 (deaths of persons 70 — 74 years old) = — 71 — 1.00 (deaths of persons 75 years old or more) = — 1716 + .10 (net migration of persons 70 — 74 years old) = + 40 + 1.00 (net migration of persons 75 years old or more) - -¡188

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Number of males 75 years old or more in Puerto Rico as of July 1, 1958

19,590

If the compilation of the data to be used in the calculations had been made on the basis of different age intervals from those used here, or if the time period between the date of the proposed estimate and that of the base estimate or census had differed from that included in the foregoing examples, the procedure would have remained the same except for the fact that the fractions of the segments and figures we have discussed would have varied accord ingly.

ECONOMIC PLANNING SEMINAR October 27 — November 28, 1958

DEMAND FOR HUMAN RESOURCES

IN PUERTO RICO By

Dr. Miguel Echenique Bureau o/ Economics and Statistics Planning Board oj Puerto Rico

Lecture prepared for the Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

DEMAND FOR HUMAN RESOURCES

IN PUERTO RICO By

Dr. Miguel Echenique Bureau of Economics and Statistics Planning Board of Puerto Rico

In the past few days an analysis has been made of the growth which the different sectors of the economy of Puerto Rico will be likely to experience in the future. The estimating technique or procedure employed in our country in forecasting growth of the different branches of the economy was also explained. Likewise, the structural transformation of the Puerto Rican economy in recent years was analyzed in broad outline, and the procedure utilized in projecting the productivity of the various branches of the econ omy was described. Now the question arises: What human resources, in terms of quantity and quality, will be required by economic develop ment as forecast? And: Will our economy be able to provide such resources? These are two fundamental problems which must be solved. The first is equivalent to a determination of the demand for human resources; the second refers to the corresponding supply. I plan to analyze the first of these questions and this morning you will also have an opportunity to hear Mr. Everett Reimer discuss the interesting problem of the supply of human resources. It is simple enough to arrive at a quantitative determination of the volume of employment or occupation called for by future economic development as forecast since the answers are already provided by production and productivity. Ordinarily it is this quantitative volume of employment that is analyzed to see whether it is compatible with the predicted population and labor force. In the case of Puerto Rico, for example, the estimated employ ment figures are always less than the anticipated total economical ly active population or labor force. We predict that not until the decade of 1970 will Puerto Rico begin to have an economy that can be considered genuinely one of full employment. However, can it be said that quantity is all that matters? Obviously, it is necessary to determine not only the total amount

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o£ jobs which economic development as forecast will provide, but the number of those who will be needed in the various professional groups, the number of workers called for at different levels of education, etc. Normally — at least such has been the case up to now — studies on the need for human resources concentrated investigation on points such as the following: In what areas is there a shortage of engineers and how serious is it? Or, how many engineers will be needed in order to accomplish this or that objective? None of these questions are sufficiently all-inclusive for our purposes. Under Puerto Rico’s industrialization program more and more new factories are going up, and it is up to us to provide the man power they will eventually require, even though the entrepreneurs are not yet on the scene. Obviously, then, the planned develop ment for Puerto Rico demands that we make provision for the supply of the human resources that may be needed at any given moment.. However, to do so we first need to know what these needs actually are. As I mentioned a bit ago, once future production and pro ductivity are estimated it is easy to determine the quantitative level of employment in the various sectors. This was the first thing that was done. You can find the results in the book already referred to in other lectures: “Economic Development Projec tions for Puerto Rico.” You will observe, for example, that Puer to Rican economic development is expected to bring about a drastic transformation of the employment structure. Thus, for example, the proportion of factory employment (exclusive of the home garment industry) which in 1950, for example, amounted to 9 percent of total employment and reached 11 percent during the last fiscal year 1957-58, should continue to grow proportionately until it constitutes an anticipated 32 percent in 1975. The second stage is to determine the composition of total employment by type of job. Population censuses constitute the only sources of information that is sufficiently detailed with respect to this point. In the case of Puerto Rico, the 1950 census is the only one which contains the necessary information on distribu tion of employment by type of work, whereas in the United States the 1910 and 1950 censuses provide comparable data. Parting from this rather limited information on the past distribution of employment by type of occupation, we were obliged to find a method that could be applied to the estimates or forecasts of future employment in Puerto Rico. We discovered such a method in the relationship observed between the type-of-occupation breakdown of employment and the level of productivity. Our hypothesis is that when a good is produced or a service rendered, the higher the productivity, the comparatively fewer the number of non-specialized occupations; by the same token, there

DEMAND FOR HUMAN RESOURCES IN PUERTO RICO

145

will be a proportionately greater number of specialized pursuits. A corollary of this proposition is: With a given productivity, one unit of output will have the same content of vocational input, independent of time and place, and provided that the technique employed is the same. Of course, we do not consider the foregoing proposition to have been demonstrated: to do so would require more profound anal ysis and the use of data from different countries covering longer periods of time. We know, however, that the data we have available currently support the validity of this relationship be tween productivity and occupation distribution. We find, further, that a rational analysis of the process of production also tends to support it. In our opinion, then, future studies and research will better demonstrate the validity of the above mentioned proposi tions. The foregoing assumption is very valuable in estimating future demand for human resources, broken down by type of oc cupation. In practice it means that data on job distribution in the economically more advanced countries can be used when estimating the need for human resources in less developed coun tries. In our case it means that information from lhe United States corresponding to the distribution of employment by type of job m the various industries can be used in calculating the economically-aelivc population in different types of work which Puerto Rico will need in order to reach U.S. levels of productivity. It is also a very practical working hypothesis when estimating the need for man power in any economy which has adequate information available on past production. We believe it worthwhile to illustrate this correlation between productivity and the distribution of em ployment by types of occupation with some examples: In the tobacco-working industry productivity in Puerto Rico, measured in terms of net income per employee in 1950, amounted to some 8780, and the percentage of professional persons in that industry was less than .2%. In the United States ten years earlier (1910) productivity at 1950 prices amounted to 81,600, and the percentage of professional persons in relation to total employment was .3%. In 1950 in the same industry in the United States the percentage of professional persons had risen to 1.1%, but pro ductivity by then had reached 85/150. These figures demonstrate the correlation between productivity and the percentage of profes sional employees. When other industries are examined — such as the garment and petroleum industries, for example — the same correlation is noted. Of course, these relationships do not hold true when comparing different industries: but neither is that our hypothesis. It is interesting to note that in the process of mak ing this analysis one runs across a goodly number of industries in Puerto Rico in which there is apparently a surplus of profes-

146

PROCEEDINGS ECONOMIC PLANNING SEMINAR

sional persons. Likewise, there are other cases in which the percentage of managers and administrators is higher in Puerto Rico than in the U.S. However, these instances do not invalidate our general hypothesis. The data also show' that industries having the highest pro ductivity always employ a higher proportion of more specialized persons. However, the specific proportion of a particular pro fessional group logically depends on production techniques which are not the same from industry to industry. Other influencing factors are the economic structure and nature of a given industry, which may vary from one country to another. Thus,- for example, the Puerto Rican industry that produces glass, cement and similar products is taken up by one large company employing a large proportion of professional persons, and numerous small firms, each with its administrator or manager and where the remaining person nel is for the most part unspecialized. In the United States the same industry is composed of a few’ large firms and many of medium size. Further, the U. S. companies have an opportunity of obtaining the necessary professional services more easily than in Puerto Rico and, in consequence, do not need to employ so many professional workers. These examples show’ that the oc cupation breakdown of employment estimates are more exact when Puerto Rico is considered as a whole than when reference is made to an industry in particular. Likewise, this breakdown will be more accurate for industries in which techniques and structural characteristics are more similar to their counterparts in the United States. When using United States data on the distribution of em ployment by occupational groups, we have eliminated several in dustries whose establishment in Puerto Rico is hardly likely. The occupation breakdown considered in these estimates is as follow’s: professional persons, managers and administrators, office workers and store clerks, skilled workers, semi-skilled workers, servants, workers in other service', unskilled laborers, farmers, and farm hands. The percentage of each of these in relation to total employment is calculated from the appropriate charts constructed from existing data, showing the relationship be tween productivity and the percentage corresponding to the various occupation groups in each industry. When plotting these lines of regression 1950 data were used for Puerto Rico, and 1910 and 1950 statistics for the United States. Tn those sectors in which productivity is similar to that of the United States it was not necessary to follow’ this procedure: the distribution of employment by’ type of occupation was predicted through direct application of the distribution prevailing in the United States in 1950. This occupation breakdown of employment was computed for each of the six principal sectors comprising the economy. For the manufacturing sector eleven different industries w’ere considered.

DEMAND FOR HOMAN RESOURCES IN PUERTO RICO

147

In the case of agriculture it would not be appropriate to apply United States data to Puerto Rico when estimating the occupa tion breakdown of future employment since the agricultural sectors are very different in point of production as well as farm ing techniques and land tenure. On the other hand, the estimated occupation breakdown of employment in agriculture can be simplified without sacrificing any great degree of accuracy. Ac cording to the 1950 census, 97.6% of farm employment in Puerto Rico was made up of farmers or administrators and farm hands. For the same year the United States, with an agricultural pro ductivity almost three times that of Puerto Rico, reported 97.8 percent of farm employment in the two above categories. However, 61% of the agricultural employment in the United States consisted of agriculturalists and administrators, while in Puerto Rico the corresponding figure amounted to only 17%. It does not appear likely that the numerical relationship between agriculturalists and farm workers in Puerto Rican agriculture will come anywhere near reaching proportions similar to those observed in the United States. By reducing the problem of the occupation-breakdown estimate of agricultural employment to these two groups (owners and farm hands), it was possible to rely solely on data referring to Puerto Rico. The Department of Labor has employment figures on farm administrators and farm workers since 1918. An extension of the trend indicated by these data, with certain modifications, leads to an estimate of agricultural employment for 1957 of 39.000 agriculturalists and administrators, and 98,000 farm workers. In this way we arrived not only al figures for total employ ment, but also were able to break down that total by types of occupation. I should like to acquaint you with some of the results. In 1910, for example, 8.2% of total employment was made up of office workers and store clerks. By 1975 it is expected that this percentage will have reached 19%. Other comparative increases that arc very significant have to do with the professions. In 19-10 the percentage was 2.9; by 1975 it should have climbed to 6.9. As you will observe, the direction taken by the foregoing percentages is as expected. At this point I should like to digress slightly. On an earlier occasion I pointed out the importance of having a forecast of the future distribution of family income. I mentioned further that when analyzing certain types of demand it is very important to have an idea not only of family income distribution as such, but also of the breakdown by families belonging to different social categories. The reasoning here was that even given equal in comes, the propensity to spend or to save could be very different among families headed by unspecialized workers. The employ ment estimates broken down by occupation group that we have

148

PROCEEDINGS ECONOMIC PLANNING SEMINAR

just been discussing are precisely the ones which the Planning Board will use in formulating an occupation breakdown of family income throughout Puerto Rico. (The occupation classification in each case will be that corresponding to the head of the family.) Picking up the earlier thread of thought regarding future employment estimates broken down by occupation: The planner should not only calculate the number of persons in certain broad job categories but should go into detail and analyze the future employment, for example, of engineers, doctors, electricians, etc. The use value of such calculations is obvious. In these estimates the assumption has been made that the breakdown of employment by specific types of occupation within a given sector of the econ omy would be the same in Puerto Rico in 1975 as it was in the United States in 1950. lie assume, for example, that among the professional personnel employed in the petrochemical industry in Puerto Rico in 1975 the proportion of chemical engineers and electrical engineers would be similar to the proportion of persons in these professions employed in the corresponding industry in the United States in 1950. Of course, our estimates of future employment for each of the specific vocations are much less satisfactory than the estimates corresponding to the broader occupation groups. What the former actually represent is only a starting point for future investigation. However, we believe that these calculations will be highly useful in the management of vocational school programs and in the general planning of education. Estimate of Employment by Level of Education

The 1950 census of the United States presents statistics on the degree of education possessed by persons in different occupa tion classifications. This information is published only for the United States in general: however, as part of the study, we were able to obtain comparative data for Puerto Rico corresponding to the year 1950. These data reveal how many and what propor tion of the persons in different occupations have had university, high school or elementary school education. Our problem is to estimate the breakdown by educational level within the various job groups. To solve it we turn again to the productivity hypo thesis, a new corollary of which might be the following: Given equal levels of productivity, two groups of like occupations in two different economies would show the same academic level break down. We must admit again that this proposition is not proven; we can say only that all the data available to us support it, and a logical analysis of the production process appears to do likewise. To reach similar levels of productivity there should be similar inputs of power, machinery, raw materials and talent, considered

DEMAND FOR HUMAN RESOURCES IN PUERTO RICO

119

all together. Theoretically, one production factor can be sub stituted for by another: For example, with better machinery and belter raw materials a less specialized labor force can produce as much as, or more than, skilled personnel who have to work with poor machinery and bad raw materials. But this seldom happens in practice. Better machinery also costs more, and the same is true of raw materials. So in order to avoid misuse and harm to the machinery better personnel is employed, and thus higher quality machinery and more complex production processes tend to become associated with a belter educational level on the part of the labor force. The more the machine does for itself, the more is demanded of the operator — for example, with respect to knowledge of the machine itself. As the productive process be comes more specialized and more complex, it demands less manual labor; at the same time, it requires a better understanding of the production process and of the job occupied by the worker in that process. Perhaps this point should be further developed because of the general impression (at times true) that modern industrial methods have simplified industrial jobs, converting them into mere routine. Il is true that jobs have become specialized. However, the operator of a modern factory is completely different from the peasants or artisans who learned their trade on their own. The industrial worker may well lack the abilities of his ancestors, but it is obvious that he needs some skills that they did not have. At least he must be able to read and understand the signs that are placed in the factory. Generally he has to be able to do elementary numerical calculations, and above all, he must have a sufficient degree of understanding and awareness of the environ ment in which he is developing, in order to avoid the thousand ways in -which his performance could be interrupted. Following this reasoning, and based on observation, we assume that if by 1975 Puerto Rican workers are to achieve 1950 United States production levels, they will have to have reached the same level of education as that of their counterparts in the U. S. labor force. Therefore, the breakdown of employment by educational levels cor responding to 1975 has been accomplished by making the transi tion from employment estimates by type of occupation to estimates of the educational level of each job group. In taking this step, the corresponding breakdown in the United Stales in 1950 has been used as a guide. For example, the foregoing estimate in dicated that by 1975 Puerto Rico will need 90,000 skilled workers. By applying the United Slates breakdown, the estimate is arrived at that the educational level distribution of this group of workers should be: 8% having 5.2 years or less of schooling; 30%, a high school education; 1%, a college education, etc. The census provides level-of-education data by occupation

PROCEEDINGS ECONOMIC PLANNING SEMINAR

Year 1975

(In thousands of persons)

Elementary

5 years

1 2 2 2 7 23

or less

3 15 11 9 33 77

2-18

12 16 12 22 50

3 9

School

21 29 65 23 27 42

5 18

158

High School

27 9 6 4 1 _+

3 5

216

55 67 100 50 90 192

2 6

High School

_+ 1

13 39

University

-10

790

Total

Junior

DISTRIBUTION OF EMPLOYMENT BY JOB GROUPS AND LEVEL OF EDUCATION

TOTAL

Type of Occupation

Professions Management personnel Office workers Salesmen Artisans Machine operators Workers, other services Workers, domestic services Farm mana<’ers Non-agricultural laborers Agricultural laborers + Less than 500

DEMAND FOR HUMAN RESOURCES IN PUERTO RICO

151

group only for the total job groups: i.e., there is no breakdown on occupation groups within each industry. The improvement which the by-industry job breakdown w'ould have introduced in these estimates is compensated, in part, by calculating educational requirements separately by age and sex. For example, since the clothing industry employs proportionately more 'women than metallurgy does, the differences in the degree of education of the workers in both industries are reflected in our estimates. The fore going table shows the results with reference to the breakdown of employment by type of occupation and educational level. From this table a certain substitution of experience for academic preparation can be inferred in each job group. This is true even of the professional and other occupation classifications that are assumed to demand strict academic requirements. This substitution occurred in fact in the United States in 1950. However, given the existing trend in each professional group as regards academic requirements, it is probable that in Puerto Rico by 1975 the substitution of experience for education will actually be less than the estimates would indicate. On the other hand, there will probably be less waste of academic knowledge such as that attendant on the performance by college graduates of manual labor of the type appropriate to ordinary laborers. Of course, this failure to take full advantage of education cannot be eliminated entirely. At the same time, it may have been greater than necessary in the United States in 1950 as a residual phenomenon of the 1930 depression.

Estimated Breakdown oj Employment by Age and Sex There is an important difference between the above estimates of employment distributed by type of occupation and educational level and our employment estimates broken down by worker age and sex. Type of occupation and level of education are fundamental aspects of employment. If an office worker is needed, and unskilled worker cannot be put in his place, nor would persons lacking the minimum level of education necessary to undertake office tasks be able to perform the job. It is obvious that a certain occupational structure must exist in Puerto Rico if produc tion and productivity levels as forecast are to be achieved. Whether those levels of production and productivity will be achieved may be subject to question, as may the degree of accuracy of our estimates of the type of occupation and educa tional level breakdown necessary to achieve them. However, the interrelation between productivity, occupation distribution and level of education is not open to doubt. On the other hand, it must be agreed that the case is entirely different with respect to age and sex requirements. Fortunately, in a given job group there can be a broad substitution of both characteristics.

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PROCEEDINGS ECONOMIC PLANNING SEMINAR

Otherwise, our production and productivity objectives could not be realized since it is not possible ior the Puerto Rican labor force in the next 17 years to combine the age, sex, and education characteristics as was the case in the United States in 1950. What is the purpose, then, of our estimates of occupation distribution by age and sex? We need these calculations as indicators of the probable spontaneous demand of employers with respect to age and sex characteristics of employees. By subsequently comparing these data with those on supply we will be in a position to tell what changes must be introduced in these characteristics. One of the fundamental tasks of the employment service in Puerto Rico in the coming years will be to determine what occupations and sectors of the economy will most readily and successfully lend themselves to such changes in the traditional requisites of age and sex. With the foregoing purpose in mind, our estimate of the age and sex breakdown of future employment has been based on the corresponding breakdown within each job group shown in the 1950 census for the entire United Stales. We do not anticipate, of course, that this occupation structure will be repeated in Puerto Rico in the year 1975, but it does not need to for our purposes. Nonetheless, in certain occupations and economic sectors the traditional requirements of age and sex have greater stability and are more difficult to change than in others. In such occupations and economic sectors the estimates are likely to represent close approximations.

Future Research The methodology we have employed in estimating the demand for human resources in Puerto Rico appears to be promising enough to merit subsequent investigation. Certain of the weak nesses in this method have already been pointed out, and in some cases the necessary steps to correct them have been suggested. It is advisable to repeat them: (1) The hypothesis that produc tion is closely correlated with the job composition of the labor force and the educational level in each occupational group needs to be more thoroughly studied, having recourse to data from the greatest possible number of countries. (2) It is necessary to study the degree of substitution between experience and educa tion, particularly in complex modern enterprise. Purpose of the Analysis Up to this point we have sketched in broad outline the methodology followed in calculating the demand for human resources. But what is the use value of such an estimate? At the beginning we said that in order to plan the quantitative and qualitative forecast of needs in terms of human resources it was necessary

DEMAND FOR HUMAN RESOURCES IN PUERTO RICO

153

first to know what those needs were, if only approximately. Vi ith the method I have just explained to you, we have been able to make up a statement of those needs. The panorama with respect to the necessary educational level of the working population in Puerto Rico in 1975 is the following: .31% of the persons employed in that year must be high school graduates; in 1950 the propor tion was only 7%. Six percent must have a university education, compared to only 3% in 1950. A scant 12% will be able to have less than 5 years of schooling, whereas in 1950 this figure amounted to 62%. These percentages given by way of example em phasize the substantial elevation which must take place in the level of education of our labor force if we are to attain our economic goals. In absolute figures it means, for example, that of the 739,000 persons representing estimated employment in 1975, 49,000 should have had a university education; 216,000 should be high school or junior-college graduates, etc. Can these levels be achieved? Under the present educational program, will it be possible to do so? If the answer is no, what plan should be adopted? These arc the fundamental questions which planners ask themselves in the second stage. Mr. Everett Reimer will answer them in forthcoming lectures. Before concluding, please allow me to disabuse you of the possible misinterpretation that may arise from this discussion on the planning of human resources. We, too, agree that economic development is not the end purpose of education. Of this there is no doubt. What we economists do say is that we should not permit Puerto Rico’s economic development to be blocked or held back because of educational deficiencies. Logically, therefore, we endeavor to formulate plans that will prevent the occurrence of such a situation.

ECONOMIC PLANNING SEMINAR October 27 — November 28, 1958

THE SUPPLY OF HUMAN RESOURCES IN

PUERTO RICO By

Everett W. Reimer Executive Secretary Committee on Human Resources

Lecture prepared for the Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

THE SUPPLY OF HUMAN RESOURCES IN

PUERTO RICO By Everett W. Reimer Executive Secretary Committee on Human Resources

After analyzing the work opportunities that economic develop ment will open up, the question arises: Will we in Puerto Rico have the necessary number of trained personnel to fill those posts? To be in a position to answer that question, we must estimate the supply of human resources. The methods for calculating the supply of human resources have been developed to a much greater degree than those indicat ing demand. However, they involve difficult problems of definition and analysis. Since we have defined the demand for human resources in terms of available employment, a logical sequence is to define supply in terms of the labor force: that is, the number of persons capable of working, irrespective of whether they are ef fectively employed or looking for jobs. Nature and Limitations oj Supply Estimates Not all the terms used to describe the demand for human resources have their counterpart in our estimates of supply. For example, we have not made supply estimates by type of occupa tion or professional group. We need these, and in future we will make such estimates; however, data will be required which presently arc not available. If everyone were to stay in his first occupation, the task of estimating the supply of human resources would be easier. But many occupations are entered through others. Furthermore, people are not always engaged in the occupation of their choice. Although certain studies have been made on inter-occupation mobility1 as well as professional preferences, to be able to estimate the supply of human resources by occupation we need data that may be obtained only through on-the-spot studies. There fore, we have concentrated our efforts on the analysis of the educa 1 Jaffe, A. J., and Carleton, R. O. Occupational Mobility in the United States, 1930-1960; King’s Crown Press, Columbia University, New York. 1954.

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tional characteristics of the labor force, since here the informa tion needed is available. There is, however, another fundamental reason for having concentrated on the educational characteristics of the labor force, and particularly on scholastic education rather than specialized training. The reason is that normally a formal education is very long in comparison with other forms of training, and even when compared with specialized instruction. A university graduate studies for 16 years, and a high school graduate, for 12. In comparison with these figures we find that specialized training in medicine, law and engineering, and the apprenticeship periods necessary in mastering a trade, seldom take more than six years. Training for the greater part of remaining occupations is considerably shorter than that, and many specialized jobs require less than a year of special training. Further, at least a minimum of general educa tion almost always must precede any type of specialized training. The long duration of general education as well as its precedent nature obliged us to give it priority when estimating the supply of human resources. The reasoning here is twofold: First, if we are currently faced with an imminent deficit at all educational levels we should predict it far enough in advance to enable remedial or preventive action. Secondly, to foster greater specialized train ing when we face an insufficiency of general education would be equivalent to robbing Peter to pay Paul. With the exception of the availability of capital, there is noth ing more fundamental for the economic and social development of a people than an adequate general level of education. If sufficient resources are available, physical facilities can almost always be con structed in a short length of time. Likewise, if the general level of education is adequate, specialized skills generally can be furnished in a relatively short period. In fact, there is no other form of cap ital investment that is more fundamental for economic and social development than investment in the general education of the pop ulation, for lacking that, any investment in physical facilities is futile. We do not mean to confuse years of schooling completed with the training necessary to carry out a job. Job performance clear ly involves fundamental altitudes and habits whose development re flects the contribution of many institutions over and above strictly educational ones. Work experience is also a necessary form of train ing for job performance. We have not refined our estimate of that experience to a very great degree, since we have permitted it to depend on a correlation with age. Even though formal education is only one form of training, in the modern world it is nonetheless the form which requires the most time and money, represents the

THE SUPPLY FOR HUMAN RESOURCES IN PUERTO RICO 159 highest degree of governmental responsibility, and is the activity over which the government exercises the most control. To calculate the size and characteristics of our future labor force we had to estimate first the size and characteristics of our total future population. This was done by the procedure of adding and subtracting from the base population figures supplied by the census taken in the year 1950. The validity of our calculations of the man power supply depends, then, on the degree of accuracy of estimated rates of mortality, birth, and emigration; school en rollment; rales of pupil retention from grade to grade; and rates of participation in the labor force. These estimates are discussed and illustrated in the following paragraphs. Estimates- Birth and Mortality Rates The volume of population depends on the rates of mortality. birth and migration. During the last decade the gross rates of both birth and mortality have declined considerably in Puerto Rico. The birth rate fell from a maximum of 43 per 1,000 in 1917 to 33 per 1,000 in the first quarter of 1957. The mortality rate dur ing the same period dropped from 12 per 1,000 to 7 per 1,000. In the last decade the rate of natural growth has declined, then, from 31 per 1,000 to 26 per 1,000. It is expected that this down ward trend in the natural growth rate will continue since the gross rale of mortality will soon begin to increase, in the measure that the average age of the population increases. At the same time, the birth rale is expected to continue to decline, to reach a level of 16 per 1.000 by 1975. The projected drop in birth rate does not have as solid a basis in actual data as might appear to be the case. The constant decline in recent years in the gross birth rate is due principally to varia tions in the age and sex composition of the population, occasioned m turn by the emigration of young men and women and the spec tacular drop in the mortality rate. Birth rates by specific ages (for example, births per 1,000 women between the ages of 20 to 24) have only recently begun to decrease, and that only very slight ly up to now. Our assumption that the birth rates will continue to decline is based on the heavy displacement of the population from rural to urban zones, and outstanding improvement in income. and the rapid rise in educational levels which undoubtedly will continue. In any event, the future birth rates have only a slight effect on the labor force in the next 16 years. Everyone who would be old enough to form a part of that labor force will have already been born by the year 1961. However, the birth rates after 1961 can indirectly affect our estimates of the labor force in various ways. For example, the effects will be felt in terms of school pop ulation and in consequence will affect the availability of resources

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that can be devoted to higher-level and adult education. The birth rates will also influence the rate of participation by women in the labor force. Finally, they can affect the net rate of migration which in the past ten years has practically compensated for the natural population growth in Puerto Rico.

Net Emigration Estimates Since 1950 the net emigration from Puerto Rico to the United States has reached an average of 50,000 persons per year, and it appears that this rate will continue during the next 16 years. If it does continue, and if our future employment and labor force estimates are correct, by 1975 the labor force in Puerto Rico will be 5% greater than average employment. In the measure that we approach the situation which can be considered of full employ ment, emigration may be expected to decrease. However, it is pre dicted that before the difference between total employment and the labor force begins to diminish, that difference will reach a higher level than the present figure, and during that period net emigra tion may be greater than the average forecast. Net emigration in Puerto Rico to the United Slates simultane ously reflects the availability of job opportunities in the United States and their absence in Puerto Rico. Unless the United Slates liberalizes entry regulations with respect to foreign immigrants, Puerto Rican workers in future will find at least the same employ ment opportunities there that they have in the past. Further, since the Puerto Ricans are establishing themselves in a growing num ber of communities and in view of the fact that future emigrants will come from an environment that is rapidly evolving toward in dustrialization. the variety of jobs available to Puerto Ricans in the United Slates should increase progressively. Even though the pay rates in Puerto Rico will increase more rapidly than those in the United Stales, it is probable that present differences in terms of dollars and cents will prevail for a long time. The barriers to movement between Puerto Rico and the United Slates, such as the cost and time of the trip and cultural and language differences, will gradually be eliminated during the same period in which eco nomic conditions between Puerto Rico and the United Slates are expected to become increasingly similar. All the foregoing con siderations are reflected in our forecast that emigration during the period to which this estimate refers will continue at the same aver age level as in the recent past. We have assumed that the emigrant population will continue to have the same age and sex composition as was the case between the years 1953 to 1955. The data for those years show7 that the great majority of emigrants are under 30 years of age. The pro portions with respect to sex are almost equal, but men emigrate in greater number between the age of 20 to 30 years, while women

THE SUPPLY FOR HUMAN RESOURCES IN PUERTO RICO 161

emigrate equally at all ages. After 30 years of age there is a net immigration into Puerto Hico, which explains the fact that our pop ulation projections show an equal or slightly higher number of persons in the age groups of 35-44 and 45-54 compared to the 25-34-year classification. It was also presumed that the emigrant population will have the same educational composition as the pop ulation as a whole. This assumption leads to conservative estimates of shortages and surpluses of human resources by level of educa tion. Although not definitive, available data strongly suggest that in the past emigrants included a greater proportion of persons with an education higher than the average for their age and sex groups. In other words, it appears that emigrants have a higher average education than that of the population as a whole, from which one infers that in Puerto Rico’s case emigration is selective in terms of schooling. An analysis of the age composition of the population of the United States also indicates that the attraction of jobs in the U. S. will be greater for those groups of Puerto Ricans (by age and sex) that have already experienced the largest drain, because it is in those age groups that the United States will need people. On the other hand, the fact that our estimates show that these same groups (by education, age and sex) will be in short supplv in Puerto Rico up to a certain point reassures us that our previous assumptions were well founded. Our net emigration estimates are so large that they constitute the most important single factor in our future estimates of the sup ply of human resources. The rate of emigration is the principal determinant not only of the total population and of that old enough to be counted among the labor force, but of the age and sex composition of those populations. The school-agc population and education breakdown of the total population also are largely determined by what groups emigrate, when, and in what proportion. School Enrollment and Retention Rates

The detailed analysis of school enrollment and retention rates has been limited to day-school programs in public and private schools. We have not overlooked the students enrolled in night extension courses and in programs of adult and veterans’ education; however, the number of persons expected to reach the different levels of education through those programs has been calculated as a variable percentage of day-school graduates, basing our figures on present trends. Keeping in mind that these special educational programs seldom include more than a small percentage of each age group, it would be very difficult to make reliable detailed esti mates of enrollment and the corresponding retention rates. Moreover, we have assumed that it is possible to project the original enrollment and retention rates for the daytime educational programs in Puerto Rico, which represent more than 90% of en

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rollment at all educational levels. However, as we mentioned earlier, we do not consider these projections as predictions of w'hat really will occur. We trust, contrariwise, that the deficiencies in the highest educational levels that we have estimated will give rise to all the necessary efforts to increase the projected enrollment and retention rates. Our projections, then, are supported by historical trends and by specific current commitments to expand educational facilities at the different levels. We have termed these projections ‘"normal program” estimates of the educational system, in contrast with the achievements that could result from an “accelerated” educational program. We trust that the latter will develop as a result of the projections themselves. The deficiencies and surpluses in trained man power of which we will speak later were calculated by taking the “normal program” of the educational system as the point of departure. The number of persons who reach each level of instruction depends, ultimately, on two factors: (1) the number of children who enter the first grade, and (2) the school grade up to which the educational system retains those children as they are promoted from grade to grade until they reach their highest level or graduate. These projections presuppose that the rates of retention in Puerto Rican schools will increase but that, on the other hand, the decline in birth rate plus emigration will occasion a decrease in first-grade enrollment. Estimates of Enrollment in the First Grade

The number of children 6 years of age was taken as the basis for estimating first-grade enrollment. The estimated decline in this number, which shows up in the population projections discussed earlier, is from 65,000 in 1950 to 39,000 in 1975. In addition to the decreasing number of 6-year-olds, there is another cause of the decline in first-grade enrollment in Puerto Rico. During recent years Puerto Rico has had extraordinary success in attracting almost all the children of school age to school. As a re sult, first-grade enrollment increased considerably, reaching a max imum of 92,000 students in the 1953-51 school year. From that time forward the first-grade enrollment began to drop. The cor responding figures were high in part because of the growing num ber of children beginning school at six and seven years of age and also because many children eight, nine, and ten (and even twelve to fourteen) years of age entered the first grade. Since 1953 total first-grade enrollment has not only diminished, but the proportion of children beyond the normal age for this grade has also declined. In the measure that more children enter school at six or seven year of age, there are fewer older than that who have never gone to school. Aware of the varying distribution of ages in the first-

THE SUPPLY FOR HUMAN RESOURCES IN PUERTO RICO 162 grade enrollment, we adopted a method oí proportions for calculat ing beginning school enrollment that takes into account the trend indicated. The first proportion is as follows:

Six-year-old children enrolled in lhe first grade Total number of 6-year-old children in the population

Between 1950 and 1955 this proportion increased from less than 30% to 55%. On the basis of the trend indicated in the five-year period (1950-1955) we have projected the proportion to reach 60% in 1965. The second proportion used Io calculate first-grade enrollment is the following: Six year-old children enrolled in the first grade All children enrolled in the first grade

We have assumed that lhe total enrollment in first grade depends in large part on the number of six-year-olds enrolled in that grade. Using the population figures and the foregoing ratio we can calculate the number of 6-year-old children in lhe first grade. If we also know what proportion of first-grade enrollment is rep resented by 6-year-olds, we can estimate the total first-grade en rollment for any year. This proportion has increased from 20% in 1950 to 45% in 1955. It is not expected to reach 60% before 1975. Dividing the number of six-year-old children in tire first grade in any given year by the percentage that these represent of the firstgrade enrollment of that year, we estimate the total first-grade en rollment. By extending the second proportion to the same numeric value as the former, that is, 60%, we are assuming that by 1975 the first-grade enrollment will be exactly ecpial to the number of chil dren born in Puerto Rico six years before. As long as the second ratio is lower than the first, this means that the number of children who enter school is greater than the total number of 6-year-olds. This is a phenomenon that can occur temporarily (as in Puerto Rico today, where many older children are now beginning their schooling), but it cannot continue indefinitely. The time will come when the first-grade enrollment cannot be higher than tire number of children born six years before. Il should be noted that, although it is true that it has been estimated that the two ratios will reach the same value limit of 60%, this will happen at different times. Therefore, it is necessary to use both steps in the estimates. I' rom 1975 on we can simply use the number of children six years of age in the population as the index of first-grade enrollment.

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Estimate of retention rates in school Retention rate is defined here as the percentage of children en rolled in a grade in relation to the total enrollment in the im mediately preceding one. The rates of retention in school which the United States reported in the year 1950 were used as the upward limits in calculat ing the future retention rates in Puerto Rico. Up to the third grade, and also in high school, Puerto Rico has already achieved re tention rates that are approximately equivalent to the U. S. rates in the year 1950. From the fourth to the ninth grades, however, the number of children leaving school in Puerto Rico is much greater than in the United States. Moderate increases in retention rates for these last-mentioned grades were projected, but only in one case did these reach the level prevailing in the United Slates in 1950. These projected retention rates were used to estimate future school enrollment from the first to twelfth grades. It is interesting to observe that even with an increase in re tention rates, the drop in first-grade enrollment will cause a decline in the school population as a whole. This creates a planning prob lem for the Department of Public Education, which has to provide for a declining enrollment in elementary schools, and an expand ing enrollment in schools at the intermediate and high school levels. However, if these characteristics of the future school population are known, planning and future expenditures can be carried out with greater efficiency and economy. Estimates of number of graduates from all levels of education Day-school enrollment figures obtained by the foregoing pro cedure were used to calculate the number of graduates at all levels of the educational system. University and high school graduates were calculated as a proportion of twelfth-grade enrollment, and junior high school graduates as a proportion of sixth-grade enroll ment. With the exception of university degrees we made separate calculations on the proportion of graduates from day schools and night schools. When projecting these proportions we have taken into con sideration such factors as historic trend, the planned expansion of educational facilities, and the interest that the people of Puerto Rico have in education. Greater increases in the number of nightschool graduates were projected than in the case of day-school graduates: Although it is true that day-school enrollment is declin ing, the population from 20-35 years of age (from which nightschool enrollment is drawn for the most part) is increasing. Estimates of the educational level of the population When calculating the number of graduates that are added to the population during each five-year period, we have had to take

THE SUPPLY FOR HUMAN RESOURCES IN PUERTO RICO 165 into consideration losses occasioned by death and emigration. To gether with our population projections which make allowance for changes in each age group every period of five succeeding years, we have calculated survival rates (which combined mortality and emigration) for each population group by age and sex for each fiveyear period. We employ these survival rates to compute the net number of graduates from each level of education that will be added to each age and sex group every five years. The estimates of number of graduates from elementary school include those persons who have continued on to junior high school but did not graduate or have not graduated from the latter (that is, they include persons who have finished six to eight years of schooling). Likewise, in the estimates of junior high-school grad uates we include those who have gone on to, but have not graduated from, high school. In like fashion, high-school graduates include those persons who have attended university but have not graduated from there. These calculations do not include persons who have obtained their degrees outside Puerto Rico. From the total of these figures we have been able to estimate the education level of Puerto Rico’s future population by age and sex. Estimates of rates of participation, in the labor force

To calculate future rates of participation in the labor force is an extremely difficult problem in Puerto Rico. Participation in the labor force in Puerto Rico today differs markedly from such par ticipation in the United Stales, undoubtedly owing to differences in cultural traditions, the nature of the two economies, and the avail ability of employment. It is difficult to ascertain the relative im portance of these factors and to determine how they may change as a result of the future industrialization of Puerto Rico. Particularly noteworthy in Puerto Rico is the fact that men at every age under 65 participate in the labor force in lesser degree than men in the United States. These differences are more pro nounced when we examine the levels of education within each age group. While in the United States the participation of high school and university graduates is more or less equal to that of the age group as a whole, in Puerto Rico junior high school, high school, and university graduates participate much less than do the other two groups with a lower educational level. This is explained in part by the fact that a large number of Puerto Rican men are taking ad vantage of the opportunity to increase their education under the Veteran’s Bill of Rights. An examination of the rates of participation of women in the labor force gives us a very different picture. Even though the women in each age group also participate to less degree than the worn-

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en in the United States, in all age groups educated women participate more than the group as a whole, and in greater pro portion than the women of the same age and educational level in the United States. The rate is higher at each higher level of educa tion. The differences between Puerto Rico and the United States seem to be easier to explain in the women’s case than in the men’s. The demand for skilled feminine labor is greater. In addition, the care of children presents less a problem in Puerto Rico where fam ily cooperation in this respect is common, and where it is still pos sible to obtain the services of a person who will look after them for a relatively low daily wage. When attempting to estimate how these rates will change as a result of growing industrialization, we take into consideration and weigh many factors, such as: the grow ing demand for skilled man power; the rising standard of living with higher salaries for men (and therefore less need for women to work) ; the increasing shortage of domestic service; the low rates of participation of educated men; the effect of expanding employ ment opportunities on both sexes at all ages and educational levels; the fact that women began to enter the new factories in greater number than men, and that this trend is at present showing a reverse tendency; the recent expansion of educational system facili ties, with the immediate result that the younger population has com pleted more years of education than the older inhabitants. One of the most important questions we ask ourselves is whether educated women would be likely to continue their participation in the labor force at as high a rate as at present. The rate of par ticipation in the year 1950 for women university graduates at the ages of 45 - 54 years was 75.2%. In view of the chanees in the conditions in Puerto Rico which have already been mentioned (for example, higher salaries for the men and the increasing servant shortage) and taking into account that in 1950 women university graduates were a small and select group, it does not appear probable that the high rate of participation that prevailed in that year will continue. There was also a great deal of uncertainty in the pro jection of the rates of men’s participation in the labor force since historic data indicate a descending trend, which we trust will be reversed. Finally, we decided to use the rates of participation by age, sex, and education in the United States in 1950 as a model for Puerto Rico in the year 1975. In actual fact, we had no better alternative. The data on participation in the labor force are of quite recent origin, and the ones available for Puerto Rico indicate a constant decline. The rales of participation must increase if the projected demand for workers is to be satisfied. Everything leads to the forecast that the rates of participation in the labor force will increase as a result of the ever-increasing number of regular

THE SUPPLY FOR HUMAN RESOURCES IN PUERTO RICO 167 jobs which are becoming available at wages which also are on the upgrade. The basic questions at issue have to do with how rapid ly and to what extent the rates of participation in the labor force will rise, and how this increase will be distributed among the dif ferent age, sex, and level-of-education groups. The structure of the participation rates in the United States in 1950 is not so much a prediction of what will happen in Puerto Rico in the year 1975 as it is a means of measuring what should happen if our human resources demand and supply are to be in balance. To provide a supply of human resources which is equal to estimated demand, one of three things must take place, namely: (1) a drastic increase in the level of education projected for the population: (2) a radical change in migratory patterns; (3) a radical change in rates of participation in the labor force. If the balance between demand and supply in the case of human resources is to be achieved solely through changes in the rates of participation in the labor force, the following would have to happen: (1) almost all university graduates would have to go to work, women as well as men; (2) a high proportion of men and women high-school graduates would have to seek employment: and (3) almost everyone who has completed five years or less of educa tion would have to stay outside the working group. For- an employ ment pattern such as the foregoing Io become reality, employers would have to be willing, without any reservation whatsoever, to employ women instead of men in occupations ordinarily reserved for the latter. Changes in the direction indicated in the foregoing paragraph will undoubtedly occur. The rates of participation in the labor force in the United States in 1950 may he looked on as the realistic limit of the extent to which such changes can take place unless the government of Puerto Rico decides to play an extremely active role — something not contemplated at present. In other words. the use of the U. S. participation-rate structure will provide con servative estimates of how much has to be done through educa tion, or through changes in the wage structure, before we can ex pect to influence the emigration decisions of many people. Our estimates of the future man power supply show that the number of college graduates in the labor force will increase from 14,000 in 1950 to 37.000 in 1975. High-school graduates will in crease from 53,000 to 219,000; those from junior high school, from 46,000 to 112.000; those from primary school, from 129.000 to 172.000. The number of persons in the labor force having less than five years of schooling will drop from 103,000 to 293,000. The above figures are certainly impressive, but the progress

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they anticipate will not be sufficient. When these data are com pared with the demand estimates presented earlier, we find a short age in 1975 at each educational level above the sixth grade, and a surplus of approximately 200,000 persons with less than six years of schooling. The estimated shortage at the university level in 1975 will be 12,000. Al high school level, that shortage will amount to 27,000; at the junior high school level, 46,000; and at the pri mary school level, 76,000. These figures, however, do not present a realistic measure of the educational task which Puerto Rico must undertake if the labor force supply is to meet demand. As we have observed, plans for any additional educational pro grams will have to take into account the fact that not everyone who receives an education goes to work; that many graduates from all school levels will emigrate, and some few will die; and finally, that all higher-educational-level graduates will have had to pass first through the lower grades of schooling. When all these factors are taken into consideration, it develops that Puerto Rico will need to increase the number of persons with primary education by 450,000 above the number which could logically be forecast under the educa tion and employment policies which prevailed in 1957. Beginning with 1957 these educational and employment policies have been studied carefully, and many have been revised. We be lieve that it is possible to achieve the necessary educational levels to meet job demand in 1975. The first step will consist in ob taining 150,000 additional graduates from primary school and in creasing the power of retention of the schools from the third to the sixth grade. This we can do by constructing more schools in the rural zones, providing more free transportation for students in the farm areas, and increasing the number of scholarships for poor children. In the second place, we will endeavor to expand our pro gram of adult education, in order to produce an additional 150,000 graduates from junior high school in 1975. This can be done by keeping the adults in school who have already enrolled in our literacy program. In the third place, we will strive to adjust our employment practices and wage structure in such way that a great er number of educated women will remain in the labor force, and more graduates from our schools will stay in Puerto Rico. If we can achieve a significant change in employment and wage prac tices, and in this way induce one out of every 17 potential emigrants to remain in Puerto Rico, we can attain our goal. We are deter„ mined that the economic development that we have undertaken in favor of the people of Puerto Rico not be doomed to failure be cause of the lack of adequate educational opportunities, or because our people have not been offered every possible incentive to work in their native land.

ECONOMIC PLANNING SEMINAR October 27 — November 28, 1958

METHODS OF OBTAINING ECONOMIC STATISTICS ON THE POPULATION By

Carlos Vilá, Director Bureau of Statistics Department of Labor

Lecture prepared for the Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

METHODS OF OBTAINING ECONOMIC

STATISTICS ON THE POPULATION By

Carlos Vila Director Bureau of Statistics Department of Labor The Puerto Rican Working Group Survey conducted by the Bureau of Labor Statistics is one of the principal tools used in measuring the characteristics of the economically-active population — that is, that part of the population which supplies the labor for the production of goods and services. The economically-active pop ulation includes employers, the self-employed, persons who work without pay for a relative, wage earners, and the unemployed (as defined hereinafter). In measuring the economically-active population, two basical ly different approaches are used. The first, the gainful worker approach, is the most common. It is based on the principle that each person in the population of a country has a more or less stable function, which he performs through a lucrative occupation, or through other activities such as those corresponding to a housewife, student, etc. This measure is obtained independently of the activi ty in which the person is engaged during the period covered by the survey. By means of a personal interview, information is obtained on the usual occupation of the person, and he is classified under that occupation, rather than under whatever activity he might have been engaged in at the time of the interview. In Puerto Rico we have adopted the second approach — that of the working group. It consists of determining the principal activity of each individual during a specific and short period of time, generally one week. Under this method we discover whether the person was employed or seeking employment during that period. and he is classified under the principal activity actually engaged in. independent of his usual activity. The concept of the working group is relatively new. It has been used in certain population censuses and has been adopted by the United States, Canada, Japan, Cuba and Puerto Rico in their regular surveys on the economic characteristics of the population. For its part, the gainfid worker approach has two advantages. In the first place, the questionnaire, as well as the interviewer

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instructions, are shorter and simpler. Secondly, the data obtained are not affected by seasonal or extraordinary conditions that may arise at the time of the survey. This last characteristic should be taken into consideration by those countries that do not make a regular survey of their population and depend on population cen suses taken at intervals of ten years or more. However, this meth od has two serious disadvantages: (1) It is ambiguous when ap plied to persons who do not have a single and definitive occupa tion, such as seasonal workers, the unemployed, retired persons, and those whose occupational activities change frequently. (2) The results obtained from this type of survey do not refer to any specific time whatsoever, and in consequence, they may not be used as a point of reference. The working group approach has several advantageous char acteristics. It provides a measure of unemployment and of changes during different periods of time. The data obtained are more ob jective since they refer to specific time periods and are susceptible of legitimate comparison with data on employment and unemploy ment obtained from other sources. On the other hand, the working group concept may reflect typical conditions existing on the date of the survey. For this reason the use of this approach is not to be recommended in coun tries that depend solely on the population census as the source of these data. This disadvantage could be obviated in part by mark ing a careful selection of the census date. In the United States, for example, the population census is taken in April when the work ing group is at a level that does not differ greatly from the annual average. Development of the working group concept in the United States

The working group and unemployment concepts were developed in the United Slates during the last stages of the economic depres sion which occurred during the decade of the ‘30’s. These con cepts were worked out principally for the purpose of obtaining more objective employment and unemployment estimates. Prior to 1930, apart from the efforts made in the population censuses there was no direct measure of any type covering the num ber of persons out of work. The increase of unemployment as a result of the great depression brought to public light a number of extremely conflicting unemployment estimates. In consequence, a large number of municipal and state agencies conducted direct surveys of the population or of population samples. A series of questions asked directly of éach person interviewed ascertained whether they were employed or unemployed. From these experimental surveys a series of concepts were de veloped that eventually were adopted by the Bureau of the Census. According to these concepts, the classification of an individual

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depends on his principal activity during the week under study: i. e., whether he is working, seeking work, or performing some other activity. These concepts have been used since 19'10 up to the present without having undergone any fundamental alteration. Definition of concepts The principal criteria used in classifying persons according to their principal activity are as follows: Employed persons are those who during the week covered by the survey: (1) were “working” — those who were doing some job for pay or gain or who worked without pay for 15 hours or more on the farm or in the business of some member of the family inhabiting the same dwelling. (2) were “employed but not working” — those who did not work or seek work, but had a job or business from which they were temporarily absent because of illness, vacation, bad weather, labor conflicts, or tem porary lay-off with instructions to return to work with in the following 30 days. Persons who had just ob tained jobs at which they were to report for work on a specified future date are included in this category. Unemployed persons are those who did not work but were actively seeking work during the week of the survey. This category includes persons who would have been hunting for work, had it not been for the fact that: (1) they expected to return to a job from which they had been “laid off” for an indefinite period of time. (2) they thought that there would he no job opportunities within their community or type of occupation: or (3) they were ill temporarily. The civilian working group includes the population 14 or more years of age, employed and unemployed. Persons “outside the working group” are all those 14 years of age or older not covered by the definitions of employed and unem ployed. This classification is broken down in turn into persons who are: (1) “devoted to domestic pursuits” — those who do their own household chores or attend to their homes (2) “in school” (3) “incapacited” —■ persons who are permanently barred from work (4) “others” — made up mainly of retired persons, vol untary idlers, and certain workers in seasonal in dustries that were in their slack period on the date

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of the survey but who were not reported as unem ployed. General characteristics oj the working group survey

Working group surveys are based on interviews with persons in a representative sample of dwelling units taken from all social and economic strata in the country. These interviews are carried out monthly in the United States and quarterly in Puerto Rico. The questions asked in the interview refer to a period of one week. Various considerations have influenced the selection of a week as the time to be covered by the surveys. In the first place, the period used should be sufficiently short so that the data ob tained will be recent, and the respondent will be able to remem ber the required information with a good deal of accuracy. On the other hand, the survey period should not be so short that a holiday or extraordinary event can cause abnormal fluctuations in the statistics obtained. These data refer only to the non-institutional civilian popula tion 14 or more years of age. Military personnel are excluded, as are inmates of institutions such as convents, penal institutions, hospitals for the incapacitated, and others, since these persons do not compete in, or form a part of, their employment market. In the United Stales, as well as in Puerto Rico, persons under 14 years of age are excluded from the survey because of laws which prohibit or regulate the employment of minors, other legislation that provides for compulsory school attendance, and prevailing social customs.

Description and scope oj the working group survey in Puerto Rico

The working group survey in Puerto Rico was initiated in the year 1946. From that date until July, 1952, it was conducted each month. Since October, 1952, the survey has been changed to a quarterly basis, to make it possible to present more detailed infor mation of the population surveyed. For this purpose, the number of dwelling units visited was doubled, and the number or surveys, of course, reduced. Sample used

The working group survey in Puerto Rico is based on a sam ple of approximately 13,000 dwelling units distributed throughout the island, with the exception of military installations. Maps pre pared by the United Stales Bureau of the Census in connection with the 1950 Housing Census are used for purposes of sample de sign. These maps divide the island into survey districts which in turn are subdivided into segments. The primarv sampling units is the segment with the size of 1, a small geographic area contain ing some 10 dwelling units in urban zones and more or less 20

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dwelling units in the rural areas. All these segments have the same probability of inclusion in the sample. In order not to weary the families included in the sample, a rotation plan is followed which does not permit the same families to form a part of the sample for more than a year —■ that is, for more than four surveys. Approximately one-fourth of the sample is replaced in each; hence, the sample is completely renewed over the period of a year.

Scope of the survey The survey is carried out every quarter, and refers to one week in each of the months of January, April. July and October. General data are obtained on all the members of the dwelling units visited. However, the information on economic activity is gathered only for persons 14 years of age or older. Military personnel and inmates of institutions are excluded.

Principal information, obtained

The survey provides the necessary data for determining the size of the working group as well as employment and unemploy ment as herein defined. In addition, data are obtained to permit all persons in the survey to be classified by sex, age and residen tial zone. In the case of employees, information is obtained on the industry and specific job in which they work, hours worked, and weekly income from salaries or fringe benefits. Type of employ ment is also ascertained: that is, whether the respondent is a wage earner, self-employed, or working for a relative without pay. In the case of the unemployed, information is obtained on the duration of said unemployment and the last occupation and in dustry in -which the respondent worked, as well as the type of em ployment in -which he was engaged. Data are also gathered to enable an estimate of the number and status of persons who did not form a part of the working group during the survey week. Supplementary information.

Together with the ordinary survey data, sufficient informa tion is obtained to permit a breakdown of the employed into the classifications of fully-employed or under-employed. This statistical practice was introduced in October, 1952, and has been continued on a quarterly basis up until the present. When making this clas sification, the following definitions are used: Full employment 1. Persons employed by the day, or on a salary, who worked 35 hours or more.

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Persons employed by the day or on a salary who worked less than 35 hours but who did not want to work any longer than that. 3. Self-employed (excluding subsistence farmers) who did not desire to work longer hours. U nder-employment 1. Persons employed by the day or on a salary who worked less than 35 hours but wanted to work more than that amount. 2. Subsistence farmers, irrespective of number of hours worked, or desire to work longer. 3. Self-employed (except subsistence farmers) who wanted to work more hours than they did, independent of the num ber of hours actually worked. Since 1953, in conjunction -with the January survey each year. information is obtained on the regularity of work during the pre vious calendar year. For this supplementary report data are solicited from each of the persons in the sample who are 14 years of age or older, regarding the number of hours worked and the occupa tion and principal industry in which they were employed during the year. In accordance with these data the persons surveyed are classified as regular or occasional employees. Regular employees are defined as those who report having worked 40 weeks or more during the year under study, and a weekly average of 30 hours or more, with occasional employees being those who worked less than 40 weeks during the year, or less than 30 hours weekly. Owing to the large-scale migration to the United States and the fact that many of those surveyed in January have worked out side Pueto Rico during part of the year under study, data on em ployment regularity are not comparable with those from the four quarterly surveys covering the same year. At irregular intervals information is obtained on the educa tional level of the non-institutional civilian population 7 years of age, or older. The last grade in school successfully completed by these persons is ascertained, as well as information on their age, sex, zone of residence, and principal activity. In addition to the supplementary information already de scribed, special surveys are conducted on the employment situation in specific industries, employment of women, medical and hospital services offered, etc. 2.

Data Collection

Number and distribution of field personnel The task of collecting data from the families included in the sample is carried out by the Field Personnel Division of the Bureau of Labor Statistics. This Division, which compiles all data used by the Bureau, consists of 165 persons stationed in 19 field units

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that cover all the municipalities of Puerto Rico. Each unit con sists of a supervisor, an editor, and however many interviewers are required in accordance with the relative importance of the munici palities under the unit’s jurisdiction. The Division also can count on the services of two area supervisors, two general supervisors, and office personnel. In advance of each working group survey, officials from the Division of Working Group Statistics train the field personnel in already-established survey methods. Training, apart from the theo retical aspects, includes a number of practical exercises aimed at familiarizing the interviewers with the problems they can expect to encounter during the survey. Meetings are held during which the interviewers have an opportunity to bring up for discussion any difficulties they may have experienced in previous surveys. For purposes of the training program, a “Manual of Inter viewer Instructions” has been prepared, which outlines in detail the concepts and methods to be followed during the survey. The Manual also includes a description of each of the questions appear ing in the questionnaire, and the order and manner in which they should be asked.

Description, of the questionnaire The questionnaire used for the working group survey includes 23 questions, twelve of which identify the respondent. The 11 re maining ones measure his economic characteristics. A question naire form must be filled in for each person 14 years of age or older who lives in the dwelling unit visited. Questions on economic characteristics ascertain the activity of the respondent during the week under study. To enable a final determination of the activity of each individual, the following rules of precedence are followed: 1. Employment takes precedence over unemployment. Ex ample: A person who in answer to the first two ques tions indicates that he was seeking employment but in addition carried out some lucrative work during the week under study is classified as employed. 2. The classification “within the working group’ takes pre cedence over the classification “outside the working group.” Example: A person reported to be a student or housewife who also indicates that he or she performed lucrative labor of some sort is classified as within the working group. 3. Unemployment takes precedence over the classification “employed but not working.” Example: A person who reports that he is on vacation but also states that he is presently seeking work is classified as unemployed.

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In order to speed up publication of the estimates, the Bureau of Statistics designed and introduced in 1958 a new interviewing system utilizing the “mark sensing” method. Under this procedure all questions as well as possible answers are classified and coded in the questionnaire. The interviewer selects on the questionnaire the key corresponding to each reply from the respondent, and marks it with a pencil having an electrographic point. This system al most totally eliminates the coding process. Data Editing and Tabulation

Editing and coding questionnaires All questionnaires are edited in the field unit by the editor and unit supervisor. They are then sent to the central office of the Bureau in San Juan, where final editing takes place. Simultaneously with the final editing task, specialized per sonnel code the occupation and industry of each person interviewed. as well as the region in which he resides. The occupation and in dustry codes are the only ones which are not printed on the ques tionnaire, due to the great diversity of existing industries anil oc cupations. After coding is completed for industry, occupation and region. questionnaires go to the Machine Tabulation Division for reproduc tion and tabulation. Machine tabulation program Working group data are processed and tabulated through the use of IBM machines. Up to and including the survey of October. 1957, the information from the questionnaires was transferred to IBM cards by the conventional hand-punching and verification pro cedures. These methods were superseded in January. 1958, by the “mark sensing” system. A special machine, which is very rapid and accurate, reproduces the information from the questionnaires on IBM cards. The introduction of this system has cut down the necessary time for preparing final estimates from three months to ten days. Once the information from the questionnaire is transferred to IBM cards, a mechanical editing process takes place. This editing permits a separation of the cards on which there are errors of omis sion or multiple perforations. There are certain questions on the ques tionnaire form that should be answered in every case. Mechanical editing discovers any instances in which the answers to one or more of these questions have been omitted. Likewise, each question should have only one reply. Mechanical editing also identifies cases in which the interviewer by mistake indicated more than one answer to the same question. This type of editing also tests the internal consistency of each questionnaire: that is, whether the answers given by the same person agree among themselves.

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Once the mechanical editing job is completed, the following tabulations are prepared: 1. Employment status (employed, unemployed, student, etc.), classified by age and sex group. 2. Employment breakdown by industry, occupation, type of worker, and sex. 3. Unemployment, classified by age group, worker type, and sex. 4. Distribution of the employed by sex and number of hours worked during the week. 5. Weekly breakdown of the employed by industrial group and sex. 6. Weekly income of the employed, by industrial group and sex. 7. Employment situation by region and sex. 8. Full employment and under-employment by industrial group and sex. Preparation of estimates

Since only a sample of all dwelling units is studied, it is neces sary to inflate the figures obtained in the survey in order to ob tain estimates for the entire island. Therefore, the information from the sample is extended to conform to estimates of the total popula tion by age and sex prepared by the Health Department’s Bureau of Demographic Registration and Statistics. These population es timates are based on the age and sex distribution of the popula tion in April, 1950, as shown in the Federal Population Census. Allowance has been made for changes which have occured since that date as a result of the natural growth of the population, net migration, and net recruitment in the Armed Forces. In order to obtain the final estimates, the data obtained in the survey are extended to cover the non-institutional civilian popula tion 14 years of age or older. All data derived from the sample on the status of employment are inflated to the level of the independ ent estimate of the population, by age and sex group. One week after the central office of the Bureau receives the last shipment of questionnaires, a preliminary report as of the date of the survey is prepared and distributed on the status of employ ment of the non-institutional civilian population 1 I years of age or more. The final report, published approximately 15 days after com pletion of the survey, contains the most important data furnished thereby. For purposes of comparison, data are included correspond ing to the previous survey and to the same period the year before.

ECONOMIC PLANNING SEMINAR October 27 — November 28, 1958

AGRICULTURE IN A DEVELOPING ECONOMY By

Luis Rivera Santos Secretary ol Agriculture and Commerce Commonwealth of Puerto Rico

Lecture prepared for the Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

AGRICULTURE IN A DEVELOPING ECONOMY By Luis Rivera Santos Secretary oí Agriculture and Commerce Commonwealth of Puerto Rico During a period of less than 20 years, the Puerto Rican econ omy has achieved a rapid development which was particularly noteworthy during the last decade (1948-1957), when the rate of economic growth amounted to 5.4% annually. During this decade. net income per person increased from 8256 to 8443, or an annual increase of 7.3%. This development is bringing about fundamental changes and adjustments in the relative position and internal structure of the various economic sectors. Agriculture is influenced in several ways by the accelerated development in the manufacturing sector, for example. Il is now possible to identify various of the changes which are beginning to appear in the agricultural sector and which affect its structure and relative position with respect to other sec tors of the economy. In these changes and adjustments Puerto Rico appears to be following the trajectory described by the peoples who have achieved rapid economic growth, with particular em phasis on swift industrial development and an accelerated urbaniza tion process. In discussing “Agriculture in a Developing Economy." I should like to examine our agriculture in terms of the above changes in position of Puerto Rican agriculture in relation to other economic sectors: the composition of. and changes in. the agricul tural operations pattern: methods and techniques utilized to promote agricultural economic development: problems created in the agri cultural sector by rapid industrialization: and. finally, the inter relation between agricultural development planning and other sectors of the economy. Change in the Relative Position oj Agriculture in Puerto Rico Puerto Rico has an area of 2,185,200 acres. Of these, ap proximately 485,600 are flatlands susceptible of mechanization, with a slope of up to 15 degrees. 582.700 acres have a slope of 16 to 45 degrees, and in the case of 1.116.900 acres the slope amounts to more than 45 degrees, in the latter areas agricultural pursuits are limited by problems of soil conservation and the dif ficulty of using machinery. These data reveal the present obstacles

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in the path of the introduction of modern technology, and par ticularly, mechanization on the greater part of our land. The area of cultivation per inhabitant is only 0.4 cuerda (0.39 acre), compared with 2.62 acres in the United States, 12.43 acres in Costa Rica, 0.78 acre in Brazil and El Salvador, 2.82 acres in Honduras, 3.69 acres in Argentina, 0.87 acre in Colombia, and 1.55 acres in Mexico. In terms of persons employed in agricul ture, there are 4.95 acres per farm worker in Puerto Rico, compared with 48.56 acres per farm worker in the United States. Total lands under cultivation amount to 874,100 acres of which a little more than 40% (357,400 acres) are devoted to sugar cane; 20% (155,400 acres) to coffee, although in a very extensive manner; and the remaining 40% (351,600 acres) are planted in tobacco, corn, different varieties of bananas, vegetables, fruits, and other crops. Apart from the 874,100 acres mentioned, there are 728,400 used as pasture land. Of this amount, 134,000 acres are taken ■up in improved and conditioned pasture lands, 410,800 acres represent natural pasture lands; and 183,600 acres are pasture and brushlands combined. In forests and brushlands we have some 198.100 acres. The remainder, approximately 122,400 acres, is non-agricullural land which includes stony terrain, swamps and roads. Thus, in general terms, can we describe the use of the 1,923,000 acres occupied by our 53,000 farms. According to the 1950 Agricultural Census there were 53,000 farms1 in Puerto Rico, of which slightly more than half were from 3 to 9 cuerdas (2.91 to 8.74 acres) and made up less than one-tenth (i. e., only 8%) of the total land devoted to farms or plantations. Approximately 90% of all the farms were in the clas sification of 3 to 49 cuerdas (2.91 to 17.59 acres) and made up 30% of the area in farmlands. On the other hand, 6% of farm holdings amounted to 100 cuerdas (97.12 acres) or more, and rep resented 60% of the total lands in farming. With respect to land tenure, 91% of the farms comprising 75% of the total lands in farming were managed by the owners themselves. These figures reveal the large number of small farms on the island and give an idea of the formidable task before us. They illustrate the need for changes and adjustments, within and without agriculture, if we are to achieve the levels of efficiency and pro ductivity that will place agriculture on a par with other sectors r The 1950 Agricultural Census defined farms or plantations as land hold ings of 3 or more cuerdas (2.91 or more acres) if any agricultural pro duct had been planted and harvested thereon during 1949 (with the ex ception of vegetables grown for home use) or if cattle or 15 or more hens or other poultry were raised on said holdings.

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of the economy in terms of wage scales, and living and working conditions. Changes have been occurring in recent years that are typical of an economy in rapid development. These changes during the period of transition and adjustment are extremely burdensome and difficult for the farmer. During this transition and adjustment stage the State is called on to assist in creating conditions that will facilitate the process. In the past ten years the farm labor force1 was reduced by 26%: that is, from 242,000 persons in 1947-48 to 178.000 in 1956-57. As a proportion of the total labor force, agriculture dropped from 36% to 28%. This reduction in the farm labor force is one of the most significant events in agriculture in recent years. It reflects demographic changes in Puerto Rico that have affected the distribution of the population by zones. This population move ment. which is typical of countries undergoing rapid industrial growth, can be highly dangerous for agriculture when the latter does not adjust with equal speed. It is quite possible that, at a given moment, the farm zones will not have sufficient labor power available to meet operation and conservation needs. As will be seen later, agricultural production in Puerto Rico did not decline during the period under review, despite the drastic reduction in the labor force and the fact that agricultural tasks have not been mechanized to any great degree. A great labor potential unquestionably has accumulated in the rural areas of countries that have not yet achieved their max imum economic development. The result is under-employment and unemployment. In Puerto Rico 55% of the farm workers have regular jobs — that is, they work 40 weeks or more during the year and 30 hours or more per week. In like manner, only 42% work 35 hours or more per week. This situation is not character istic of agriculture alone: The figures corresponding to manufactur ing are 58% and 56%, respectively. It should be pointed out that changes in the agricultural labor force in the direction of movements to non-farm areas facilitate certain of the necessary adjustments in agriculture. However, as we said earlier, the transition period ordinarily creates serious ad justment problems. An increase in worker productivity has been one of the favorable results produced by the reduction in the farm labor force during the last decade and the consequent need to improve tech nology in general and machinery and equipment in particular. The agricultural labor force is made up of all persons in agriculture, whether employed or unemployed.

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Measured in terms of net farm income in dollars of equal purchas ing power1, worker productivity in agriculture increased by 29% — from $635 per employee in 1947-48 to $900 in 1956-57. In all the non-farm industries, the increase amounted to 41%, and in manufacturing, 142%, showing an increase from $798 per worker to $1,937. The general index of physical production in agriculturei2 remained stable during this period, although there were substan tial increases in certain of its components. Therefore, the increase in productivity per worker, measured in terms of net income of the economy, has been generally attributable to less labor. It may therefore be concluded that in situations such as ours a smaller labor force can maintain the same level of production and even increase it significantly. An expanding agricultural pro duction has been the experience of the United Slates, despite a continuous reduction in the farm labor force. This is possible, of course, because of the high investment per worker. To achieve such a level of investment in agriculture is a serious problem for under-developed countries because of the other investment alternatives open to the limited capital resources that are available. In Puerto Rico, as elsewhere, an accelerated increase in efficiency will be possible principally through a substantial increment in in vestment per worker. This, in turn, will require a substantial capital investment in machinery, equipment, and other technolo gical advances. In addition, a certain degree of increase in pro ductivity or efficiency can he attained by developing skills, encouraging sound work altitudes and habits, and paying incentive wages for work performed in excess of the normal assignment. Agricultural employment in Puerto Rico is very seasonal in nature — a reflection of the land-use pattern. Influenced by the seasonal characteristics of farm employment and the impossibility of working al non-farm tasks during periods of slack activity in agriculture, farm workers migrate in search of permanent nonagricultural employment opportunities. There are indications that in certain agricultural areas, and particularly during harvest season, there is a real shortage of workers which could be very dangerous for agricultural development. This is particularly noteworthy in the case of sugar cane and coffee.3 The decline in the farm labor force primarily represents a reduction in the number of persons employed in that activity. During the last decade the total number of persons employed in agriculture drop i The index of consumption expenditures of Puerto Rican (amities with a 1948 =100 base was used to eliminate the effect of price variations on net income. Wc are aware of the limitations of this procedure. - Physical production index calculated on the base 1948-50 = 100. ■■ How to retain the necessary labor on the basis of income consistent with the level of aspirations of Puerto Rican families is one of our serious problems in the field of agriculture.

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ped by 29%, which is the percentage of reduction observed in the farm labor force as a whole.

Composition and Changes in Agricultural Utilization Pattern Puerto Rican agriculture may be considered commercialized in nature. Subsistence agriculture is coming to be a thing of the past. Almost all the major products — sugar cane, milk, coffee, and tobacco — are shipped off the plantations or farms for consumption principally in urban areas of Puerto Rico or in the United States market. The limitations of the local market should unfailingly be taken into account for purposes of economic development planning. In like manner, it is imperative to keep in mind the potentialities and limitations of exportation. Agriculture contributes 15% of the net income (national income) of the Puerto Rican economy. As was to be expected. this proportion has been diminishing as a result of expansion in other sectors, particularly manufacturing. Ten years ago agri culture generated 26% of total net income. Although for several decades sugar cane has been the principal agricultural product of Puerto Rico, the relative im portance of that crop has been changing in terms of source of employment and income. During the last decade, net income derived from sugar production dropped from 51% to 40% of net income from agriculture. Certain events have taken place in those ten years that have affected the relative position of the sugar industry. In 1953 individual quotas were imposed on sugar cane producers. As a result, sugar production, which had been climb ing at the rale of 4% per year since the end of the Second World War, dropped 14% between 1952 and 1953 and has not recovered its normal level to dale. The introduction of individual quotas, although producing considerable benefits in other respects, has had a very adverse effect on plantation renovation and on the relative speed with which technological advances are instituted. The sugar industry is undergoing a difficult period which calls for heavy investment .o finance the necessary innovations that will assure greater efficiency and higher productivity per worker. This experience demonstrates the dangers and risks attendant on an agriculture, which depends in large measure on a single product: in this case a crop produced in competition with several other areas of the world. We have been aware of this situation in Puerto Rico, and great efforts have been pul forth to introduce greater stability in agriculture through diversification of produc tion. Nevertheless, because of the heavy fixed-capital investments already in the sugar industy, plus the fact that we possess the appropriate climate, soil, abundant labor (until recently), and a sure market at reasonable prices for sugar produced within the quota, diversification efforts have not as yet produced the desired

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results in terms of magnitude and dynamic impetus. Some pro gress has been made, however. Net income originating in other agricultural undertakings increased 36% during the last decade, compared with a 13% decline in sugar cane. In addition to the production of milk, which has shown a very substantial increase, efforts are made to develop meat pro duction including beef, pork, and poultry. Approximately half of these items in Puerto Rico are imported. With respect to beef production, there are large tracts of pasture land which can be devoted to this purpose. The increase in the pasturage capacity of these lands as a result of the farm program is very important. Recognizing that in the marketing phase modern slaughterhouse facilities are imperative, the government is en couraging the establishment of such services. To assist in the production of poultry, pork and eggs, two factories are being established that will manufacture feed concentrates. The supply of feed concentrates at reasonable cost for the farmer is a factor which exercises a great deal of influence on the extent to which the new poultry and pork production efforts can develop. Pineapple growing is being encouraged, and a modern pineap ple canning plant with an annual capacity of 40,000 tons has been established. In the case of coffee, produced in the mountainous area in the interior of the country, a marked effort is being made to increase coffee yield per acre which al present amounts to some 206 lbs. A special program, begun last year, is aimed at reclaiming 80,600 acres of coffee by means of incentive pay ments to farmers. In the face of the world coffee situation, Puerto Rico hopes to reduce the land area devoted to this crop, and in crease production per acre. We must cooperate closely with the efforts of other coffee producers in Mexico, Central and South America, with a view to stabilizing coffee prices. Various fruits and vegetables figure among the other crops whose development is encouraged for local consumption as well as for export. These products are supported by minimum price guarantee programs and the establishment of markets, in or near production areas, where the farmers may sell their produce. In addition, these markets provide facilities for proper classification and packaging of fruits and vegetables. The farm utilization pattern in Puerto Rico has entered a period of transition brought on by the accelerated development of other sectors of the economy. Specific development circumstances have had serious repercussions on agriculture: for example, popula tion movements, the rapid increment in salaries and wages and the changes in consumption habits as a result of increased purchasing power and the rapid expansion of urban areas. All this appears to call for a land-use pattern in favor of livestock raising and a forced modernization of crop production methods,

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looking toward greater worker productivity and more stability in employment to assure the retention of sufficient labor. This agricultural utilization pattern presupposes certain obvious capital movements toward agriculture. How to achieve them constitutes one of the basic questions our agriculture must resolve. Methods and Techniques Used in Encouraging Agricultural Economic Development Since the beginning of the century and as a result of the introduction of United States capital, a land-use pattern developed in Puerto Rico characterized by large corporations devoted to the production of sugar. These firms look advantage of the abundant and cheap labor provided by thousands of worker families who lived after the fashion of tenant farmhands. It became necessary to alter this pattern, and in 1941 the Land Act of Puerto Rico was passed, creating the Land Authority for purposes of enforcement of the new legal provisions, which limited corporate land ownership to 500 cuerdas (485.6 acres). Four programs were initiated under the Land Act, namely: 1. The Establishment of Proportional Profit-Sharing Planta tions. 2. The establishment of Rural Communities, where farmhand families could be resettled. 3. The establishment of Family-Type Farms. 4. Education to develop group action for the benefit of farm families. As a result of this legislation, 250 rural communities have been set up for the resettlement of 43,000 families who used to live as tenant farmhands —■ for the most part on sugar cane and coffee plantations. Eight hundred and fifty family-type farms have been set up, which have an average of 16 cuerdas (15.5 acres). Since 1950 the farmhand resettlement and family-type farm pro grams as well as others of a social nature have been carried out by the Social Welfare Programs Administration of the Depart ment of Agriculture and Commerce. The Land Authority operates the Proportional Profit-Sharing Farms. There are 76 in all, covering an area of approximately 34,600 acres. The farms are devoted to sugar cane and provide annual employment for some 45,000 workers, among whom planta tion profits arc distributed. The Authority also operates two sugar refineries and a pineapple-canning plant. Recent amendments to the Land Act authorize the establish ment of Subsidiary Corporations designed to encourage certain agricultural projects, including the production of pineapple, livestock and sugar cane, and agricultural development in general. This approach is directed toward converting the Land Authority into an efficient instrument for promoting the type of

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agricultural development that appears to be the most consistent with Puerto Rico’s current, over-all economic development. To encourage and adapt to this type of development, it is necessary to apply various techniques and methods in addition to effecting changes in land-tenure and plantation size — which in themselves are quite important. However, since plantation ownership and size cannot be drastically altered in relatively short periods, present policy is to achieve the greatest possible efficiency and productivity within a given land-tenure pattern. To bring technological advances to the agriculturalists, generate interest in their adoption and provide the necessary eco nomic means and training is a formidable task which calls for the best possible planning and the most enthusiastic and coordinated effort on the part of all the agencies in any way connected with agriculture. We have not solved this problem yet in Puerto Rico, but are working arduously toward that end. The recently-created Agri cultural Council represents one effort in that direction. In the field of agricultural education and dissemination, there is an Agricultural Extension Service that follows the organiza tion pattern set in the United States. The Service is manned by 254 Agents, Specialists and Supervisors, and there is a local Ex tension Office in 67 of the 76 municipalities on the island. An Agricultural College is also provided, as well as an Agricultural Experimental Station employing more than 200 technicians who undertake research work. Finally, we have a Vocational Agri culture Program administered by more then 100 instructors in vocational agriculture. In the measure that we accumulate experience in the field we become increasingly aware that the education and training of the farmer must be much more dynamic than we had originally anticipated. Instructing or uniforming the farmer through meet ings and lectures is not enough: this activity needs to be com bined with a more intensive and practical demonstration program. By demonstration, the good results of the new practices and methods that arc being taught must be communicated. Education and information programs are very important tools in encouraging economic development. However, they must be accompanied by ways and means of enabling the farmer to make effective use of this newly-acquired knowledge when it involves changes in the way of doing things. Adequate credit and group action (i.e., the operation of cooperatives) are two excellent instru ments for achieving that purpose. In the matter of credit, we mentioned earlier that there is an obvious need in Puerto Rico for substantial capital movements toward agriculture in order to achieve the desired type of de velopment. Such a capital movement toward farming is a

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normal occurrence during rapid economic development. Agri culture has to modernize its techniques and introduce the new technology in terms of machinery, equipment, new varieties, seed selection, improved animal breeds, new buildings and other practices. This calls for a source of credit administered in a manner consistent with the characteristics inherent in the business of agri culture. Experience does not counsel attempts to provide agricul tural credit through institutions that try to apply to farm loans th» * same set of standards utilized in non-agricultural lending. The imposition of such standards results in an excessive rationing of capital in agriculture, hence retarding the accumula tion of the necessary investment in that industry. Agricultural de velopment requires capital investments that cannot be recovered at short term. In consequence, an intermediate-term credit source is needed, to supply funds at two to five years that will permit investment in machinery, equipment, buildings, and so forth. Tn Puerto Rico short-term credit service (i.e., up to one year) has shown much greater progress than intermediate-and long term credit facilities. This is true despite the existence of a goodly number of agricultural credit institutions. The operating methods followed by these institutions would appear to call for substantial revision. Il is estimated that of total annual credit grants for agri culture in Puerto Rico, approximately 90% are made at short term (one year or less). On the subject of the cooperative movement, I should like to mention that 326 cooperatives operate in Puerto Rico, 31 of which are farm cooperatives. Two of the latter are centralized sugar refineries. Several cooperatives (one in coffee and three in tobacco) handle the marketing of one-third the annual crop of coffee and tobacco. There are cooperatives which supply fertilizer, insecticides, animal feeds, and other agricultural materials and farm implements. Apart from handling product sales, marketing cooperatives provide materials and other services, such as advance cash financ ing for crops. We are encouraging the cooperative movement in general, and are placing particular emphasis on participation by small farmers, in such way that they can enjoy the advantages of large-scale operations. In response to the importance of the cooperative movement, the Cooperative Development Administration was created recently. Its function will be to coordinate the various cooperative develop ment and regulation programs carried out heretofore by several agencies, including the Puerto Rican Bank for Cooperatives.

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Problems Created in the Agricultural Sector by Rapid Industrialization A bit ago we examined the effects of rapid industrialization on the agricultural labor force, pointing out the increase in pro ductivity in terms of net income of the economy. We also in dicated the need to channel substantial amounts of capital into agriculture. One of the most serious problems faced by agriculture in Puerto Rico today as a result of rapid economic development is the swift rise in agricultural wage scales. Farm salaries and tvages are directly affected by the constant increases which are taking place in other industries — particularly in manufacturing, cons truction and commerce. The differences between general working and living conditions in agriculture and those prevailing in other economic activities is one of our basic agricultural development problems. The influence of non-agricultural development on agri culture is peculiarly direct in Puerto Rico for this reason. Because of the relatively small size of the area and the rapid progress in communications and transportation which has led to a high degree of population mobility, the rural zone is far from being an isolated, independent area insensitive to what is happening in other sectors. In company with the rapid expansion of towns and cities, industrialization aimed at reaching rural as well as urban areas has caused disproportionate increases in land values in Puerto Ri co. The land-market value of a given piece of land is very dif ferent from its so-called “agricultural value.” As a result, when credit agencies agree to finance the purchase of plantations by interested farmers the assessment value they place on farm land is so conservative in relation to the market price that such purchase is made extremely difficult, and at times, even impos sible. This situation becomes even worse when such agencies provide credit financing for only a part of the agricultural value of the land. In Puerto Rico rapid economic development has affected the level of aspirations of all the island families, including those hav ing low incomes and inhabiting the rural areas. The impact on the level of aspirations of the rural population is due in large part to the accelerated progress in means of communication and transportation (which has been of particular benefit to the farm areas). Other contributing factors include the seasonal migra tion of farm workers. To satisfy the wants of the farm population and to prevent an exodus from the rural zones, it is necessary to continue to improve available services and facilities such as housing, medical attention, electricity, rural water supply, highways and others. In

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the important matter of housing, Puerto Rico has been very suc cessful in developing a low-cost housing program. With labor contributed by the prospective resident families themselves who have been organized for the purpose, it is possible to provide a concrete dwelling measuring 18 x 18 feet at a cost of 8350. Initiated in 1950 when 28 dwellings were constructed by way of experiment, the program is currently constructing some 1,500 dwellings each year. The technique of mutual aid among families in the rural zones is also being put to use in the construction of student dining rooms, schools, rural water mains, roads, bridges, and a variety of permanent public works projects which improve living conditions in the farm zones at a minimum cost to the public treasury. Interrelation. of Agricultural Development Planning with Other Economic Sectors This discussion has made frequent reference to Puerto Ricos experience regarding ways in which agriculture is affected by, an responds to, development in other areas of the economy. The de velopment process obviously produces changes in the relative im portance of the different economic sectors and in their interna structure and organization. . . . Agriculture is very susceptible to events outside it. 1 ul ier more, the market of the production factors serving agriculture does not seem to operate with sufficient dynamism, flexibility an e ficiency to permit the necessary adjustments to take ,Pace ,a~ rapidly as they should. To improve the functioning of this mar e is an important task which should by all means have a p ace in economic development planning. . , a . Economic development planning cannot fail to include agri culture. That part of the economy cannot be left to its a e in the belief that it will of itself effect the requisite changes and adjustments as rapidly as is necessary to keep it from being re ega e to the permanent status of a low-income sector. . ouD advances in other areas have favorable repercussions on a^ricti tural development, some of these cause serious problems and injec elements of disarrangement in the agricultural sector, par icu ar y at short term. To reduce these effects to a minimum. ie way in which agriculture will be affected must be anticipate w en formulating plans for development in other sectors, and t ie m ces sary changes must be instituted that will permit farming to a ju.. itself with the desired speed to the new situation. The above interrelation between development planning e or in the various sectors is highly important, particularly as reoar ways and means of raising income derived from arinino o level which can bear comparison with that from ot ier sec ors. This means that agricultural productivity has to increase o eve s

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comparable to those that are achieved in non-farming enterprise. Taking into consideration the continuous growth of nonagricultural sectors in Puerto Rico, agriculture’s future prospects and relative importance will depend in large measure on the degree of efficiency that can be achieved in that activity. Improved efficiency requires, among other things, greater capitalization, improved techniques, and better information. These, in turn, call for effective coordination in economic development planning. Another sector which should be given special attention in order to assure a satisfactory interrelationship between agriculture and the rest of the economy is that of public services. Rural areas should receive an adequate share of the public funds chan neled to those services.

ECONOMIC PLANNING SEMINAR October 27 — November 28, 1958

ECONOMIC PLANNING PROBLEMS AND TECHNIQUES IN CONNECTION WITH THE DEVELOPMENT OF PUERTO RICAN AGRICULTURAL PRO GRAMS AND PROJECTS

Guillermo Irizarry Executive Secretary Agricultural Council

Lecture prepared for the Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

ECONOMIC PLANNING PROBLEMS AND TECHNIQUES IN CONNECTION WITH THE DEVELOPMENT OF PUERTO RICAN AGRICULTURAL PRO GRAMS AND PROJECTS By Guillermo Irizarry

Executive Secretary Agricultural Council

Purpose The purpose of this Seminar is to acquaint you with the problems encountered and techniques employed in carrying out economic planning intended to serve as the basis for the formula tion of policies and programs, and ultimately the promulgation of legislation and the preparation of the corresponding budgets. To accomplish that purpose papers have been presented by persons in charge of these affairs at different levels of public administration, and by technicians who specialize in gathering the basic data necessary to economic planning analysis. My assignment is to outline to you the problems encountered and the techniques employed in carrying out economic planning in the field of agriculture, with special reference to the develop ment of specific programs and projects. I assume that your primary interest is in knowing how we have gone about the work of planning agricultural programs and projects in the past, what results have been achieved, what our current planning efforts consist of and whether or not we are satisfied with the outcome, what we should like to do in the light of our experience, and in what manner we are organizing the planning function for the coming years. In order to give you a clear picture, I shall take the liberty of outlining the agricultural services the State supplies the farmer, and the way in which these services have come into being. I shall discuss the relationship between central planning and the develop ment of specific programs and projects. I shall also present some recommendations which to my way of thinking represent the best way of developing a specific program or project in the sense of special care that must be taken during the course of such planning.

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The Commonwealth and the Government of the United States a. Agricultural affairs The organization of this Seminar, participated in by person nel at varying levels of government administration, of itself in dicates that planning is a function that should be exercised at all management levels. In this fashion it is possible to discuss the same subject from different positions, but with reference to the same objective. The organization of the present Seminar testi fies further to the fact that it is necessary to be thoroughly familiar with the governmental structure in order to understand the workings of project formulation and development. I do not believe that one can discuss the development of economic planning programs and projects in a given country without a knowledge of the government structure which makes the creation and operation of such programs and projects possible. The discussion of government organization is of primary importance with respect to the problems which may arise in project or pro gram preparation and, therefore, in the techniques used to solve them. I should like to describe briefly the governmental structure of the Commonwealth as regards agriculture in order to facilitate an understanding of local problems in economic planning in agri culture. I shall also touch on the way in which such planning is interrelated with the development of a Puerto Rican agrarian policy and with the formulation of programs or projects. Some of you are already familiar with these aspects. In these cases I shall refresh your memory and endeavor to indicate clearly the position occupied by each of the various government agencies. The Commonwealth is a democratic political organization with a Chief Executive who has well-defined responsibilities in rela tion to the people who elect him, and a bicameral assembly where congressmen arc duty-bound to safeguard the interests and well being of the electorate. The executive and legislative branches, in conjunction with the judiciary in its constitutional function, create agencies to solve the problems that beset the country. The obligations to the electorate give rise to specific programs and projects and to the agencies that will look to their proper ex ecution. The Commonwealth is joined to the government of the United States by ties that make it possible to carry out a number of United States government agricultural programs or projects in Puerto Rico that reflect the executive and legislative will of the United States and are an expression of national agrarian policy. National programs sometimes fill local needs wholly, but on oc casion only in part. Certain of these U. S. government farm pro grams have no direct bearing on the development of agriculture in the Commonwealth, while the influence exerted in the case of others

ECONOMIC PLANNING PROBLEMS AND TECHNIQUES 199 is noteworthy, indeed. There are also state agencies and their programs that are expressions of the local executive and legislative will. Here again we find certain United States agricultural pro grams that have no direct influence on the development of agri culture in the individual states. Popular will finds expression in the preparation of projects by representatives of the two governments since both are democratic in nature. These are the two principal bases on which local think ing rests, and which serve to guide agricultural affairs in the Commonwealth. h. Cultural relations In addition to the government relations between the United Stales and Puerto Rico, the two areas are closely linked by certain cultural ties. These relations leave a decided mark on the thinking of those who are in agricultural work. The majority of the Puerto Rican technicians in agriculture study, and base their professional training on, texts and other material prepared in the United Stales. Their ideas and methodology of action or pro gram performance tend to call on the experience had in the United States.

Agricultural organizations in the Commonwealth There are nineteen organizations in the Commonwealth which provide direct or indirect services for the farmer. These agencies range from specialized ones that administer a single program or project to others that are so versatile in scope that they administer a considerable number of projects or programs. The needs of slate have made it necessary to create the fol lowing agencies: a. Department of Agriculture and Commerce b. Land Authority c. Sugar Council The Department of Agriculture and Commerce at one time included research and education among its functions. Reflecting United States’ thinking as expressed in the operation of the “Land Grant Colleges,” some twenty-five years ago the University of Puerto Rico fell heir to the tasks of farmer education and agri cultural research. These functions are now carried out in the Agricultural Extension Service and the Agricultural Experimental Station. The Faculty of Agriculture, which perfects agricultural techniques and constitutes the third element in the “Land Grant Colleges” system, already formed a part of the University of Puer to Rico and thus did not change position when that system was established in this country. Later on the Program of Vocational Education in Agriculture was organized. Conceived some time earlier in Puerto Rico and responsible for the creation of the

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Faculty of Agriculture in the University, the program was pat terned after a similar service in the United States and its ex ecution was commended to the Department of Public Education. The Government of the United States maintains a number of services in Puerto Rico which satisfy national and local needs. These are as follows: a. Farm Stabilization and Conservation Service, which administers the sugar and cotton quotas and provides soil conserva tion incentives. b. Soil Conservation Service, which furnishes technical as sistance for the farmer. c. Farm Home Administration, that supplies supervised credit for the small farmer. d. Agricultural Research Service, with its divisions of Soil and Water Research and Forests, plus an experimental station specialized in research on tropical plants. e. Commodity Credit Corporation, which administers a credit program for tobacco raisers. : f. Agricultural Marketing Service, which operates a program of tobacco classification. g. Livestock Regulation Program, which administers the Animal Quarantine Program and handles Meat Inspection. h. Vegetable Quarantine Program. i. Food Distribution Program, which functions as a part of the United States farm production subsidy program. The foregoing agencies and programs represent services provided by the Department of Agriculture of the United Stales Government. In addition, the Farm Credit Administration operates in Puerto Rico. This organization reports directly to the President of the United States and provides services in the form of various types of credit. It should be pointed out that each U. S. government agency reports individually to its home office in the United States. The executives of the slate agencies report directly to the Governor of the Commonwealth in some cases: for example, the Secretary of Agriculture and Commerce, the Director of the Land Authority, and the President of the Sugar Council. (The last two officials mentioned may on occasion channel their information through the office of the Secretary of Agriculture and thence to the Governor.) The Agricultural Experimental Station, the Agri cultural Extension Service, and the Faculty of Agriculture report through the Rector of the University of Puerto Rico to the Supreme Council for Education, an autonomous agency. The Director of the Vocational Education Program reports through the Secretary of Public Education to the Governor of Puerto Rico. It is well to remember these channels of public responsibility in order to understand the action taken on a local level because

ECONOMIC PLANNING PROBLEMS AND TECHNIQUES 201 this is the framework of service and these the lines of responsibili ty that must be kept in mind when conducting programs and pro jects in Puerto Rico.

Non-agricultural government agencies exercising a basic influence on the preparation of farm projects and programs The greatest influence on the development of specific agri cultural programs or projects is exerted by the Legislative As sembly and the Chief Executive. In Puerto Rico, as I explained earlier, this legislative and executive influence comes from two distinct sources. In the case of the Commonwealth, the Chief Executive can call on certain agencies that will help him evaluate those projects and programs: namely, the Planning Board and the. Budget Bureau. These agencies are primarily concerned with review ing and passing on the ideas and principles embodied in the projects or programs proposed by the various agencies. In the exercise of this function they assess tne thinking processes and planning procedures of the proponent organizations. In effect, the Planning Board and the Budget Bureau govern performance: Only in very slight measure do they formulate plans to provide the bases for the prospective projects and programs. However, because they recommend the resources that enable program realization, their influence on establishing the relative importance of each program is basic. So much for the organization that makes planning and action possible. At this point I should like to analyze the services in volved and their bearing on crop production. Agricultural services and crop production The agricultural services referred to here are composed of various specialized functions. These generally are centered in special agencies. Like functions or services are not always handled by the same agency. The fact that various agencies perform the same function is at times the result of personal convictions of agency directors regarding the way that the work should be carried out; or, this circumstance may reflect accepted performance procedure. Insofar as government services are concerned, crop development always depends on several functions and hence on action taken by various agencies. No one, of course, will question the fact that achieving the final objective calls for a fundamental contribution on the part of the farmer himself. In Puerto Rico the following types of services are provided for the agriculturalist: agricultural education for the farmer; training of technicians; research; regulation; stabilization of markets and production of certain crops; credit; regulation of com mercial dealings; and, in general, protection for agriculture. These

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seven primary functions are those that are executed through the nineteen services outlined earlier. The agriculturalist, of course, is not interested in government functions as such but in obtaining better results in the production and disposal or sale of specific crop or crops. This “crop ap proach” on the part of the farmer makes it necessary for the various government functions (and, therefore, the performance of the appropriate agencies) to converge in practice in specific areas of action. However, the inter-service relationship depends in large measure on the origin of the agencies to which the various services are entrusted. The inter-agency relationship presents a problem in the preparation of specific projects and programs. More ac curately, I should say that this situation represents a major obstacle in the planning of specific programs and projects and must be overcome in the interest of saving economic resources that ordinarily are in short supply.

“Noil-agricultural” services that affect the development of specific programs and projects Time does not permit a discussion of the in fluence exercised by numerous government activities in the socio-economic field which have an important bearing on agricultural programs. One point I should like to make here, however, is that the preparation of specific agricultural programs or project- should take certain factors into consideration without fail: i.e., the level of education of the rural population; health: communication facilities, includ ing radio, highways, etc.; the Commonwealth’s labor policy: and official policy regarding the distribution of wealth. I earnestly re commend that these important elements not be overlooked.

The development of service in the Commonwealth

Certain of the services or functions provided for the agricul turalist in Puerto Rico have been developed as a result of their success in agricultural development work in the I niled States. Other services have been created by local thinking and endeavor aimed at solving regional problems. The services provided by the United States Government represent the local application of national programs. The creation of projects within these services are not the result of the prepara tion of development plans, or of an integral planning effort of the State. Moreover, most of the agricultural services paid for by the Stale in Puerto Rico are not preceded by an analysis of the general situation which, by pointing up specific needs, would indicate the types of services that should be supplied to satisfy them. In many cases, as I have observed, these agencies were organized on the basis of a transfer of ideas from other areas and

ECONOMIC PLANNING PROBLEMS AND TECHNIQUES 203

led to the establishment of autonomous operating procedures. Even in certain cases where agencies were founded entirely on the basis of local processes of thought, the same error of conferring absolute autonomy was committed. Some of the agricultural services in Puerto Rico that owe their form of organization to the recognized wisdom of such ser vices in the United States arc education, credit, conservation of natural resources, research, and certain aspects of the regulation of, and protection for, agriculture. The recent development, of belter marketing systems to safeguard the farmer also has its inspira tion in the experience had in the United States. Other programs. such as that of the sugar quotas, originated in the dual and simultaneous need to protect the consumer and provide security for the producer. The program mentioned by way of example is both national and international in scope. Among the programs or projects created byr the State to solve the serious problems that have arisen in various areas of the agricultural economy we have the Land Authority, which looks to the problem of excessive land holdings and the distribution o wealth in the principal agricultural industry of the country sugar cane. Then there is the Sugar Council which handles the relations between the agriculturalists and the sugar refineries, anc tbe Department of Agriculture and Commerce that devotes its ef forts to profecting the farm industry in general. As may >c deduced from the foregoing, the development of agricultura services and of the agencies that provide them for the farmer a\e originated in a manner completely divorced from central planning. It is recognized, however, that by virtue of the attention they' give to agricultural problems, the Chief Executive and the Legislature or national Congress exercise an important planning function. . There is no question but that all these services, whatever their origin, are necessary for the development of agriculture, contribute Io its improvement, and are inspired in the need to belter the agri culturalist’s situation and that of the country in general. At tie same lime, it is also important to point out that so disjointe a development of tin * system of services creates a problem in the prep aration of specific programs or projects. I have described the origin and nature of the agencies that gimle the work of the agricultural planner, and have also in< waled which authorities were responsible for their creation. The ¡mictions and interrelationships of those agencies, plus the sources o authority I hat enable them to accomplish their mission, constitute I in frame of reference with which planners must be thoroughly acquainted in order to schedule their activities and outline the complementary elements needed in bringing the specific projects and programs to fruition. The idea that I have tried to bring to you up to this point is that the, preparation of agricultural de-

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velopment programs or projects of a given area is very closely related with the organizations that provide the service involved. The relationships existing between strictly local agricultural services in Puerto Rico are not pertinent to the case of your various countries. However, I do hope that you will remember that it is necessary to study the governmental structure of your area as the basis for establishing a methodology in the preparation of agricultural programs and projects. My purpose in describing the local situation has been to contribute to your understanding of our experiences and of the measures described later in my talk. Economic planning and the development of specific programs and projects

As stated earlier, the planning function is carried out at dif ferent levels of the government mechanism. To date Puerto Rico has not been able to develop central planning in the field of agri culture, although tremendous efforts have been put forth to that end. Although it has fallen short of the objective of integration, this endeavor has aided considerably in organizing collective think ing in agricultural planning. The efforts exerted in this respect hiive been so intensive as to include a joint review of all agri cultural activities in Puerto Rico, a task that was undertaken by officials of the U. S. Department of Agriculture and the Govern ment of Puerto Rico. The Department of Agriculture and Com merce also took a step toward integrated planning by creating a planning and budget unit. Unfortunately, that agency has never reached the degree of maturity nee— -ary to enable it to realize the functions that its name implie-. In practice, therefore, the result has been that agencie- continue operating individually. In consequence, a considerable number of project- or programs pro posed by each agency find themselves subject to modification by the influence of the legislature and the local head of government. Other projects or programs have been created by the Chief Ex ecutive or the legislature without benefit of any intervention what soever on the part of the operating agencies. The preparation of farm programs and projects has been a function of each agency individually. The programs originate in response to the desire of each organization to comply with its in dividual functions. This situation is even more apparent, of course, when the agency in question has been created for the express pur pose of carrying out a specific program. The work of these or ganizations has followed instructions or outlines provided by the legislature and the Chief Executive. The preparation of agency work plans in the agencies has been characterized by the same type of administrative autonomy pointed out earlier.

ECONOMIC PLANNING PROBLEMS AND TECHNIQUES 205 Agency operations favor the creation of new projects or pro grams, ]it is true, but this energy should be channelized effectivey difficult task in the midst of the administrative heterogeneity iat characterizes the local situation. This diversity of origin has mace it difficult for the agricultural organizations to come to a mu ua understanding of their objectives and, therefore, of the conri ution expected of them. Resort to the individual approach has ecome evident, despite the fact that for the past ten years the epartment of Agriculture and Commerce has fostered the general po icy of promoting a commercialized and diversified agriculture, conservation of natural resources, and an orderly marketing of farm piocucc. Neither this policy nor the formulation of very broad 0 q<dives (such as the improvement of agriculture, the develop ment of better techniques or the achievement of a higher level of e ucation for the farmer) seems to satisfy the general planning concepts held by the participants in Puerto Rico’s agricultural deopment. In themselves these concepts — which are common to many other countries also — do not generate differences of opinion among those directly involved in agricultural pursuits. The dificulty, in my view, has to do with establishing an adequate sys tem to administer the services that will permit uniform interpreta tion of the general concepts. Such action would enable all the agencies, or at least a group of them, to develop their projects simultaneously, thus contributing to the solution of specific prob lems the element of opportune action. • r . ^cultural planning is highly complex and difficult, and it is fairly safe to say that the central planning agencies should lean leavily on the planning action of the organizations directly related to field operations. This relationship between the working levels and I he general planning units is necessary if a situation is to be avoided in which recommendations are presented that overlook im portant aspects of the production economy or the practicability of the programs involved. J he development of specific programs and projects will be more effective when the central economic planning agencies form ulate their recommendations with lucidity and the Chief Executive and legislature make definitive decisions regarding the policy to be followed. Such a procedure requires that agency organization be con ducive to fulfilling the function of project or program prepara tion. However, the formulation of plans in the respective agencies should be founded on common plans. In many cases the programs or projects proposed on the basis of the recognized utility of a service — the recognized utility I spoke of earlier — have not been accompanied by the analysis necessary to define the problem clearly and with certainty and provide the background data cs-

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sential to project preparation. As a result, when the project is prepared, basic elements of the problem slip by unnoticed. Highly important agricultural programs or projects came into being without the systematic participation of agricultural planning units. Those programs expressed the need for action at a time tvhen their creation appeared to be justified; but they miscarried because there were no plans that could guide them in a desirable future direction. It is quite possible that in some cases no action what soever was taken along the lines originally intended. Other programs were organized on the basis of faulty data and without the basic analysis that would permit appraisal of the ef fective progress of the work. In consequence, after years of ef fort the hoped-for results were not obtained; but neither were the necessary tools available that would have permitted the programs to be evaluated in lime to take corrective action. There has been no lack of worthy intentions to benefit agri culture. However, at the time of preparing a project or program in tentions are not enough unless accompanied by analysis. The agricultural industry in this changing, industrializing econ omy has felt the impact of the economic change wrought by in dustrialization; hence a greater effort for survival is required not only in competition with other geographical areas but with the remaining sectors of the local economy as well. Ordinarily aimed at agricultural development, the farm services mentioned face the problem of how to achieve maximum benefit and coordination in their programs or projects. Certain services, of course, such as credit, education, and re search could scarcely have negative results. In these cases, even when planning has lacked continuity, it is always possible to point to achievements in favor of agricultural development. With such services the crux of the matter is how much more might have been achieved, had their activities been tailored to a recognized agrarian policy. Need for a project planning system

The principal defect of the unilateral development of specific projects or programs by a given agency (even when general con sultation may have been resorted to in many cases) is the lack of adequate analysis of the relationship between such action and that of other organizations. It is common for an agency to be unaware of what others are trying to achieve in the same field. The tendency is to suppose that the problem can be solved solely or principally through the efforts of the organization doing the analy sis. In this way we have programs or projects which although intended to solve a general problem are essentially programs of education, research, regulation, or direct incentives. However, the solution of agricultural problems invariably depends on more than

ECONOMIC PLANNING PROBLEMS AND TECHNIQUES 207 one function, even though in many cases the results of the action taken weigh heaviest on a single function. The problem attended to unilaterally in program scheduling does not enable the discovery of basic ills which at long term have more influence on the de velopment or improvement of agriculture than the action marshal led for the project itself. For example, an element frequently over looked in planning for livestock raising is that the development of a vigorous cattle industry depends on the general sanitary environ ment of the livestock, which in turn calls for the control of diseases and protection of the area through quarantine and other regula tions — to mention only a few of the requisite activities. These services are provided by more than one agency and may require constant investigation. A project for the development of improved breeds without considering these other activities may mean wasted effort. Also, the educational planner seeking to encourage the adop tion of new agricultural practices may overlook the importance of a favorable economic outlook for the farmer which can induce him to make a generally-costly change in his way of doing things. The farmer’s attitude reflects the force of a number of pressures, such as the market (which in turn depends on the income of the pop ulation and means of communication); or they (the pressures) derive from his ability to produce at costs which will permit him to compete with other farm products locally and in other areas. In the planning of specific programs and projects one shoidd not fail to analyze these action-determining indirect elements. The preparation of projects or programs should be part of a system or mechanism capable of overcoming the obstacles pointed out above, as well as others which I will omit in the interest of brevity. 7/te specific program or project I he development of a specific program or project is, in my ju< (-tm.nt, one step further in the procedure of putting the plan !■" 'his means that in the preparation of the plan the <asi ulity of carrying out the project should have been taken into < onsi'lcration. 1 he general plan should result from a situation ana ysis founded on a scries of public policy premises that serve as ,i trame of reference for government participation in economic ' 1'vmpmenl. If such participation is to be limited to providing 'a rlain services leading to action on the part of the agriculturalist, t k specific project or program would be of a different nature than 1 (. 1 ,lc government plans to participate actively in the performance o I io production task itself. I mention this circumstance as an ex amp e of the fundamental bases which can completely modify the orm, manner and content of specific programs or projects. Pro ject formulation should not be merely an expression of what must

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be done in a specific field with relation to a general plan: it should describe in detail the action that an agency or group of agencies should take in order to achieve a given objective. The better the general situation analysis, and the better defined the aspects which must be looked to in order to overcome the development obstacles involved, the more effective the preparation of specific projects or programs will be. In like manner an inadequate definition of what is to be accomplished makes it more difficult to prepare the specific projects or programs. The development of a program or project in the system of government described at the beginning of this paper may have as its source of information the projects approved by the legislative assembly; or, it may be the product of the work of the Chief Ex ecutive and of the agencies assisting him. In the preparation of a program or project designed to take steps authorized by the legis lature it is necessary to know precisely what objective is sought through action, relate that objective to the over-all goal, and deter mine whether or not the project promotes action in the general di rection of other existing projects. The second analysis would be performed with the view of recommending subsequent modifica tions while complying meanwhile with the legislative assignment. In essence, program or project preparation consists of clear ly understanding the goal for achievement, designating the neces sary participating elements to assure effective field work, and mak ing sure that all the participating agencies understand the object ives and prepare their projects accordingly. The preparation of specific projects should not present v<-ry much difficulty when the planning and approach of the general program are based on ade quate data and are the result of conscientious analysis. In Puerto Rico we have not been very successful in applying this system of simultaneous preparation of projects in relation to well-defined objectives. Perhaps this is due to the lack of a clear definition of what is wanted and to the complex administrative system on which we must depend to get the job done. 1 his deficiency is not easy to correct for. as I said before, not only the organizations that have a direct bearing on agriculture have something to say in this matter, but. independent of them, ideas to take care of specific situations are generated in the legislative or executive branches. The major problem facing us currently lies in obtaining gen eral guidance that may be clearly understood by all the participants and determining the method of enforcing combined action. This is a matter of considerable concern to all those connected with agri culture in Puerto Rico. To my way of thinking, it will not be possible to solve this problem and obtain such guidance and understanding until such time as government machinery becomes available which is capable

ECONOMIC PLANNING PROBLEMS AND TECHNIQUES 20.9

of producing in a single administrative process the combined ac tion of general planning and specific program or project prepara tion. This is perhaps the most important problem faced in the prepara tion of programs and projects connected with the economic plan ning of the Government of Puerto Rico. The fact of not having been able to resolve this situation satis factorily in years past has caused a great deal of uneasiness in the performance of Puerto Rican farm programs. One gains the im pression that very substantial sums have been invested in seeking a solution to the agricultural problem without success. These in vestments in general have been gone about hastily, with little thought of procedures. The value of careful analysis prior to adopting a well-defined agricultural development policy and preparing pro grams or projects has been underestimated in the extreme. Analy sis and continuous consultation in general planning or in specific projects in agriculture arc always imperative, and even more so when the action will be performed by numerous agencies. To omit a technical, social or economic detail may mean the use of im portant resources to no purpose whatsoever. There are very few, if any, projects or programs in agriculture that can be carried out without the preparation of projects or programs specifically relat ing to various services. The procedure described by Dr. Scott Keyes in his methods of analysis of agricultural resources and the demand for farm products will serve as an example: To employ the analytical procedures he describes, it is necessary to make use of the knowledge of those who instruct the farmer, investigators who point the way to technological advances, economists who outline systems of agricultural operation, agronomists who determine the potential of the land and the natural limitations such as climate, and the market technicians who indicate the sales potential for agricultural products and the necessary marketing facilities. This list is not comprehensive but is intended by way of example. All this knowledge is generally the product of the activity of various organizations: it is in Puerto Rico. The basic analysis of the problem requires the participation of this conglomerate of services. Further, when the schedules arc set up for specific projects, it is necessary to resort to these services once again, but then in greater detail. In résumé, we recommend the following method for develop ing specific programs or projects: a) To determine the problem and its causes, taking into con sideration economic development factors within and with out agriculture. b) To relate the problem to the agricultural development policy and determine how action is favored, or hindered, thereby.

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To determine the possibility of solving the problem, in variably taking into account certain basic aspects of the area involved, such as climate, land, the degree of educa tion of the agriculturalist at a given moment, communica tions, technical knowledge, markets, etc. d) To study the alternate ways of solving the problem. e) To determine the functions or services necessary for the action planned. To determine the customary contribution of those services, as well as whatever additions or modifica tions may be necessary. Various agencies or administrative units would be affected. To determine the new services or functions which must be organized. Again, various agencies or administrative units would be affected. f) On the basis of the results of the foregoing analysis, to prepare projects or programs aimed at accomplishing the necessary, field work. The program or project should be a detailed statement of the plan of action. Objectives should be established at opportune time, as well as the means of evaluating those objectives. The presentation of reports and an outline of the essential contents thereof should form a part of the project itself. g) To integrate all the projects in a general program and present a comprehensive picture of the situation. This ac tion will help the : • dl isl tive branches under stand the need for the various projects in the solution of the problem and will facilitate the appraisal of the use of resources. The more harmony existii projects and public policy, the easier it will be to bring about an understanding of the value of the propos rogram oi jecl th i le jislative or executive level. The prepararon <>i ~ ’ ' ■ . / ' ■ . < i • ? ¡ore re fined analysis of the agricultural development program or policy. The latter represent an expression of intent or a description of areas of action. The true possibilities of success for the program or pro ject begin with the analyses which will establi-h the general direc tion to be followed. The program or project should have private as well as public support, and both areas should be surveyed in that respect. It is necessary, further, to make projections based on the expected re sults of the programs. Having situated the program or project in its proper relation with the official agrarian policy, technical difficulties, knowledge on the part of the agriculturalist, economic facilities of the farmer including land tenure, competition from other areas of production or internal economic competition, one should proceed to the details of the following aspects:

ECONOMIC PLANNING PROBLEMS AND TECHNIQUES 211 Objectives to be attained 1) Long-term goals — general goals for the program or project and specific ones by type of activity. 2) Short-term goals — general goals for the program and specific ones by type of activity. b) Assignment of participation in program performance and lines of responsibility. 1) Participation and area of responsibility of the private sector in various aspects, including financing. 2) Participation and responsibility of the government with respect to promotion, technical assistance, incentives, legislation, etc. 3) Necessary coordination. c) Establishment of priorities in program execution. d) Evaluation of the results in terms of goals set and actual accomplishment. e) Re-examination and necessary adjustments in the program to maintain development al the desired rate — or a re adjustment of the goals, if this becomes necessary.

Puerto Rico’s experience with respect to solving the problem and applying the principles outlined For several years attempts have been made to follow a gen erally-understood public agricultural development policy and to in duce harmony among the specific programs or projects of the vari ous agencies or organizations. Management studies of certain or ganizations led to administrative changes and a better definition of their functions. The Study of the Executive Branch of the Gov ernment of Puerto Rico resulted in other changes, and in the mat ter of delineating areas of jurisdiction, the Chief Executive made the Secretary of Agriculture and Commerce responsible for the de velopment of an agricultural program in Puerto Rico. Despite these efforts it has not been possible to achieve a sufficient degree of inte gration that woidd enable institution of the method wc consider it ad visable to adopt. Just two years ago a review or appraisal of the general ad ministrative situation was initiated. Shortly thereafter this study gave rise to the formation of a body known as the Agricultural Council of Puerto Rico, where membership consists of all the heads of the farm agencies and executives from certain other agencies whose programs are related to agriculture. Presided over by the Secretary of Agriculture and Commerce, the Council has been as signed the following responsibilities: a) To recommend the objectives of the Commonwealth’s agricultural program to the Governor. b) To discuss the programs or activities of each of the farm

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agencies of the Commonwealth in relation to the objectives of the general program and to recommend the correspond ing order of priority. To discuss the budgetary, capital, and operating needs of each agricultural agency of the Commonwealth in connection with the programs or activi ties to which the Council has assigned an order of priority, and to make appropriate recommendations. c) To negotiate the cooperation of the agricultural agencies of the United States government who work in Puerto Rico in order that they coordinate their programs or activities with the programs or activities of the local agricultural agencies. d) To discuss, and make recommendations concerning, the as signment of Commonwealth agency functions aimed at achieving the objectives of the general program, including the preparation of the necessary legislation. To discuss, and make recommendations concerning, the means of per forming certain functions believed necessary to the success of a given program or activity but which cannot be under taken because of provisions in the statutes or regulations governing agency operation. e) To recommend that any action necessary to facilitate ex ecution of the programs agreed on be taken through the directors of Commonwealth-supported organizations in agri culture or allied field-. or through whatever officials said directors may designate. To receive reports on the progress made in each of these programs; and to endeavor to ac complish a similar purpose through cooperation agreements with the United States government farm agencies that func tion in Puerto Rico. The Agricultural Council is devoted to regulation and coordina tion. We trust that goals will be defined more precisely in the con tinuous group action exercised in the Council and with the partici pation of persons at technical levels made available to the Council through the Planning Unit at its service. Al the same time it should be possible to fix objectives on the basis of the best data available — the direct contribution of the various agricultural specialists. In the process of formulating the general objectives, agencies will conn1 to an understanding of what each organization’s specific participation should be in point of performance. It is therefore hoped that their action will be harmonious with the com mon goals. If the Council’s recommendations are acepted by the Chief Executive and the legislature, it is anticipated that the agencies will be in a position to undertake specific programs or projects in dependently that will be compatible with the decisions of the high er authorities.

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The Agricultural Council represents an effort to assure that the general management of the agricultural program will have the benefit of advice from persons at technical levels to the greatest extent possible. At the same time, the Council should serve to in terpret continuously and effectively the objectives and purposes of the general program for those at operational levels. In this way specific programs or projects can be prepared simultaneously or in time to allow for the formulation of a general plan or program. I attach an information bulletin entitled, “The Agricultural Council of Puerto Rico,” in which the origin, constitution and functions of that body are described in detail. The formula or method we have chosen to solve this problem responds entirely to a local situation, but I venture to say that certain teachings as outlined below may be derived from our ex perience in preparing specific agricultural programs or projects: a) In their relationship with economic development agricultural programs or projects are an expression of specific action which should tie in closely with the general economic sit uation. b) Given the need to relate agricultural action to the general economy, projects must be based on integral analyses: They should not be permitted to become unilateral expressions of the agency involved. c) Since agriculture responds slowly to change, government machinery should make it possible for analysis and pro gram scheduling to take on continuity through long-term planning. The preparation of programs or projects should be the product of certain government machinery which should be specifically established for the purpose. d) No known service in local agriculture is superfluous for our situation. Very possibly it would be beneficial for your areas to adopt these services; however, it is important that they be established under the philosophy that they are part of a whole. Further, they should be founded firmly on the theory that they exist for the purpose of responding jointly to the solution of common problems. e) The program or project should express the legislative and executive will, but every project should undergo continuous analysis in relation to the problem it was intended to solve. These analyses can produce fundamental changes in the thinking of the executive or legislative branch. f) The project or program should be a detailed exposition of a general plan. Provided the agency knows what is wanted, and what is feasible in practice, project prepara tion is not difficult. It is always hard to determine wheth-

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ECONOMIC PLANNING SEMINAR October 27 — November 28. 1958

INDUSTRIAL DEVELOPMENT IN

PUERTO RICO

By Teodoro Moscoso

Administrator Economic Development Administration

Lecture prepared for die Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

INDUSTRIAL DEVELOPMENT IN PUERTO RICO By Teodoro Moscoso

Administrator Economic Development Administration In Puerto Rico the names of various organizations carry the word “development”: the Economic Development Administration, Industrial Development Company, and Government Development Bank, to mention only the most important. Directly or indirectly they have to do with the development of ports and airports, com merce and the tourist trade, as well as the development of man ufacturing industries. They also participate in certain aspects of agricultural development. Through the Planning Board and the Bureau of the Budget, and also through certain inter-departmental committees such as the Financial Council and the Agricultural Council, the work of these “development” agencies fits into the gen eral economic development program. However, the greater part of Puerto Rico’s economic growth has been industrial in origin and, as you probably have already become aware, projections relative to future growth rely heavily on increases expected in income generated by the manufacturing sector of the economy. The explanation of our dependence on man ufactures, particularly those destined for export, is negative as well as positive. Puerto Rico has few natural resources, apart from land and climate, and the greater part of our good earth is already development in high degree, 'faking an average of the good and bad soil, the income produced per acre is very high — probably one of the highest in the world. (In the United Stales the aver age farm income per acre of cultivated land amounts to $56.63. In Puerto Rico it is $228.58.) For that reason, the greater part of our efforts aimed at agricultural development require compar atively high capital investment per acre and, even then, the gen eral effect is more that of increasing income per farm worker than of elevating the value of output per acre. Economic development efforts encounter similar difficulties in other primary industries, such as forestry, mining, and fishing. Just as in agriculture, we are investing substantial sums in in

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vestigation and exploration work, but unless we strike oil or discover great veins of valuable metallic minerals, even the projects which are successful will probably be of limited importance for the econ omy in general. In the field of the tourist trade, where we can count on natural advantages, our growth has been the most rapid in all the Caribbean area. However, at least up until now, our market has been limited for the most part to persons in comparative ly high income brackets who can afford the luxury of air travel, which is relatively expensive. From the U. S. one can drive to places of touristic attraction in Mexico, and it is only a short flight to Cuba, Bermuda and the Bahamas. I might add here that the opportunity to develop manufacturing industries to produce for the local market is also limited. For example, with less than 1% of our labor force we can produce in three weeks enough brassieres to meet the needs of Puerto Rican women for a whole year. (I’m tempted to paraphrase the economists by saying that, in effect, demand for this product is on the large side, but it is not yet sufficiently elastic.) In the majority of the countries of the world, the opportunities for development in the extractive industries, such as agriculture, mining, forestry and fishing, are considerably larger than in Puerto Rico, and, in some cases, local markets are more extensive. There fore, when endeavoring to increase production and income these countries are not obliged, as we are, to depend in large part on the expansion of the manufacturing industry that produces for export. Nevertheless, you as well as we have a positive reason to foster de velopment of the manufacturing industries, particularly those that by virtue of being modern and efficient can replace current im ports or produce for export without the need of customs protection or government subsidies: The reason I refer to lies in the ability of modern manufacturing to produce very high incomes. The fundamental purpose of all economic development efforts is that of increasing per capita income. In the greater part of the world where efforts are being made to achieve a rapid increase in incomes, development is a dual process: on the one hand new jobs are created to utilize the productive energies of persons who are unemployed or “underemployed”; on the other, workers move from low-income occupations to those that carry a higher hourly rale. Quite frequently the two trends complement one another. For example, when seasonal farm hands change to the field of man ufacturing or construction, this displacement is frequently from hourly labor or something similar to the complete 48-hour work week most weeks of the year. The changes also involve movements to jobs that produce relatively high incomes. Nevertheless, there are many cases in which the development process can only be interpreted as a change from the industry that produces low income to the high-income-producing industry. In

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agriculture, for example, the development process involves a displace ment toward operations having a higher degree of productivity, such as the livestock industry. In similar fashion, within man ufacturing there is a displacement from needlework, a low-income activity, to heavy industry, which produces much higher yields. Even within a single manufacturing group, such as the garment industry, development will bring about a change from hand sewing to machine work, W'hich is more productive. In the development of the majority of countries, manufactur ing plays a crucial role with respect to the creation of new- em ployment and the change from low-yield occupations to those of fering greater remuneration. One of the reasons this happens is that in many of the relatively poor countries available arable land is already completely occupied. For this reason, improvements in the industrial sector have to take the form of more intensive tech niques and fewer workers, rather than a more extensive utilization of new lands. Even when virgin land is available, more capital is ordinarily required to establish farms that produce a given amount of income, than to establish equally productive factory employment. In those places where there is a severe population pressure on the land, as in the case of Puerto Rico, employment and profits in the form of earnings derived from a given investment in manufactur ing are much higher than in the case of the same investment in agriculture. From the point of view of occupations, the largest decline has occurred in agriculture and home sewing. In 1950 half the jobs in private enterprise in Puerto Rico w'ere in these two rural in dustries. However, together they produced only one-fourth the total net income of the Commonwealth. The annual average wages of the workers in these industries was less than S500. For needle work done at home pay amounts to only two or three dollars a week. In eight short years the home sewing industry has virtual ly disappeared, as has most of the subsistence agriculture. The drop in employment — if one can call such badly-paid and sporad ic activity employment — amounted to more than 100,000. Despite this huge exodus of 40% of the rural labor force, the decline in agricultural production has been comparatively small, and the yield per worker and worker wages are approximately 25% higher than eight years ago. Manufacturing and construction have been the dynamic sectors of the economy. Constituting less than one-seventh the employ ment in private enterprise in 1950, factor)’ and construction work ers at present account for almost a fourth. The principal impact of factory and construction workers has been on income. In 1950 less than one-sixth the net income of the Commonwealth was trace able to this group, with home sewing and agriculture contributing approximately two-thirds. Today the former account for more than

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one-fourth the total, or, two-thirds more than agriculture and home sewing. In manufacturing the yield per worker has almost doubled since 1950, representing an increase in productivity almost four times as rapid as that which has occurred in agriculture. During this eight-year period important changes have taken place in the internal structure of manufacturing, about which you shall hear tomorrow. Industries affiliated with the agricultural sectors that are on the decline have also fallen off —■ for example, sugar refineries and tobacco stripping operations. Industries that sell solely to the local market have found themselves limited to the gradual increase which has taken place in consumer demand. Pro gress is principally attributable to new industries, the majority of which did not exist prior to 1950. These factories are the result of the program of the Economic Development Administration. Among the material you have been given you will find two graphs which show why those industries have been so important for Puerto Rico. In the first graph you will note that the income produced by these industries, together with modest increases deriving from the tourist trade and the promotion of rum, is responsible for practical ly all the general progress registered in net income in the Com monwealth in recent years. Whithout them, real income per capita would have declined substantially. The second graph shows how the increase in exports is entirely attributable to the new factories. I should like to remind you of something I said a moment ago. Probably without exception, in the countries you represent the potential of agriculture and other extractive industries is great er than in Puerto Rico. Some of your countries provide better local market opportunities. In Puerto Rico, however, in order to grow we have found ourselves obliged to promote the development of manufacturing for export. While the results are a long way yet from our family income and employment objectives, they have nonetheless been substantial. Next I should like to describe to you briefly certain of the tools that we used and how we went about the program. I should also like to say something about the organization and present scope of the development program. I refer you to a monograph in Eng lish which is currently being translated, written by Dr. William Stead, entitled: “Promotion — The Economic Development of Puer to Rico.” This book describes in more detail the field I am about to discuss, and those of you who are interested can obtain it right here. After explaining how our program functions at present, I should like to point out some of the errors we have made. I am sure that we continue to commit errors and no doubt will do so in future. At any rate, I believe that we are not falling into the same errors time and again. Perhaps the simplest description of our way of going about the industrial development task would be by saying that we tried

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to proceed on a practical plan. Our objective is social and eco nomic betterment, but we believe that our methods have to be as direct and realistic as possible. In actual fact, our operations are similar in more than one respect to those of a private company. We have an “article” to “sell,” to a very select group of industrial “customers.” Our mission is to turn out the product as perfectly as possible from the point of view of the customer, in order to sell it to all the potential customers within our reach. Let me first tell you of the article itself, and a bit later, of the steps we are tak ing to sell it. Once any country or region decides to undertake the task of industrialization, it becomes aware in short order of how difficult it is to create investor interest solely on the basis of a labor force anxious to work (but lacking the necessary degree of skill) and the availability of places in which to establish factories. Never theless, factory sites and labor are the principal resources in an underdeveloped country, unless it has been especially favored by nature with minerals or other physical resources — which is not the case in Puerto Rico. Here the government has assumed the primary responsibility for training workers and seeking and developing locations in which industrial plants can be established. We have discovered that in the characteristic confusion of rapid development it is necessary to plan in advance, in such way that places chosen for faetón * sites are accesible to highways and other means of transportation. industries will have sufficient space in which to expand their opera tions, and factories which produce materials essential to the rest are close to one another. Thoughout the country we have separated certain areas for industrial development, zoning others as com mercial or residential districts. Although there are private companies and individuals who at present are developing certain areas chosen for factory locations. the biggest burden rests on the shoulders of the Industrial Develop ment Company. The Company was created in 1912 and originally carried the entire weight of the industrialization program. The Eco nomic Development Administration grew out of the Company as a result of the government reorganization in 1950. Today the Industrial Development Company is essentially a real estate development corporation and in a more limited fashion. an investment enterprise. As of June 30. 1958. its assets amounted to more than $73,000,000. and a glance at certain of the more im portant entries on its balance sheet will clearly indicate the nature of its operations. The biggest item is that corresponding to in dustrial buildings and machinery (S 11.000.000 before deprecia tion). The building occupied by this hotel (the Caribe-Hilton) and its equipment amount to almost $10.000.00 before depreciation, and other hotels that are presently operating account for almost a mil

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lion dollars. Construction projects under way are to a value of more than $5,000,000, and the individual lots under improvement and development represent §13,000,000. Investments, about which we shall say more later, amount to more than $7,000,000. The cap ital of the Industrial Development Company consists of some $54,000,000 contributed by the Commonwealth Government, and approximately $4,000,000 in undistributed profits. A short while ago the Company floated a bond issue for $15,000,000, sold to private investors in the United States. It is true that the Industrial Development Company is active ly interested in selling its lands and buildings to private interests and in encouraging private companies to develop industrial and tourist trade projects. What is important to point out here is that this public corporation is still assuming the primary responsibility of developing land for factory sites and constructing Puerto Rico’s industrial buildings. This makes it possible to deliver alreadycompleted buildings to any industrialist who can utilize a structure of current size and design. The delay for building construction is avoided since the shell of the factory is already available. The Industrial Development Company designs and constructs special in stallations for those who need them, placing them al the disposal of the industrialist under a leasing arrangement. The development of factory sites is something more than a question of acres and buildings. As we have mentioned earlier, access to principal highways is extremely important. An even more essential element is an adequate and reliable supply of electric power at a moderate price. The responsibility in this instance falls to another public corporation, the Puerto Rican Water Sources Author ity, which was created in 1941. In its beginnings it could count principally on waler for motive power, but today thermoelectric generating plants supply 80% of the electrical power consumed in the country. The Water Resources Authority is today a $262,000,000 corporation. Originally established with government capital con tributions amounting to $14,000,000, it has a history of good ad ministration and substantial income which have permitted it to sell $161,000,000 in long-term obligations, principally in the United States market. The demand for electric power has been increasing at the ap proximate rate of 18% per year. The fact that its installations have increased rapidly enough to slay on a par with these new needs is a tribute to the Authority’s foresight and initiative. From the point of view of the industrial development “product” we have for sale, the significant point is that in contrast to the usual practice of private firms, the Waler Resources Authority does not wait until demand for electric power builds up before beginning to provide new generating and transmission installations. We know that the capacity of the electric power system in Puerto Rico will have

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doubled in the next four years, and we can therefore assure our prospective customers that they will have an ample and reliable supply of electric power. Water and drainage connections will also obviously be needed by the new plants, some of which will be heavy consumers. The Water Supply and Sewage System Authority has made pure water available to all the urban zones and the majority of the rural areas. The supply is ample in most small towns, even in times of drought. By anticipating the unusual demand which might result from the establishment of new industries such as oil refineries and paper mills, the Authority is following a program of research and ex ploration, and participates with other government agencies in the work of necessary planning in order to determine the best location for industries of that type. The installations of the ater Supply and Sewage System Authority have been increased by two-thirds in the last five years, and its total assets amount at present to ap proximately SI22,000,000. This is another example of a ’..ell-run public corporation which can obtain its own long-term financing without encroaching on the borrowing margin of the Common wealth. The external means of transportation, as well as their cost. constitute critical questions for the new industries, the majority of which have to ship both raw materials and the finished product. 1 he development of wharves and airports is the responsibility of the Port Authority of Puerto Rico which, like the Industrial De velopment Company, is a public corporation affiliated with the Eco nomic Development Administration. One of the achievements of the Port Authority with which you are already familiar is the new airport. It was completed only three years ago and constitutes a good example of how important it is to plan with optimism it one wants to keep up with the rapid changes resulting from an in dustrialization program. The technicians that formulated the plans for the San Juan air terminal a few years ago predicted a movement of 968,000 passengers by 1970; but that figure has al ready passed the million mark. The seemingly optimistic projec tion, made in 1950 for twenty years later, was exeeded even before half the time period had gone by. The movement of air freight has also increased quite rapidly, having almost doubled between 1950 and 1957. Most industrial cargoes are carried by ship, and in this respect the primary responsibility has fallen to private individuals. Never theless, the government is vitally interested. Of the 21 docks cur rently operating, 10 are public property. We have done every thing in our power to accelerate the introduction and increase ot the new system of tankers and modern cargo-handling techniques. We work in the interest of peaceful collective bargaining in the port zone since any interruption of port services in Puerto Rico

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or the United States constitutes a serious problem for our industrial ists, as well as the two and one-quarter million inhabitants of Puerto Rico. Our interest in the means of transportation also extends to the constant analysis of the relative cost of transferring products man ufactured in Puerto Rico to markets in the United States and other parts of the world. Many industrialists suppose that Puerto Rico is always at a transportation disadvantage tvhen compared to the industrial zones of the United States. However, we have discovered in some instances that a factory located in Puerto Rico can serve many United States’ markets at a lower transportation cost than can be done from some point on the continent. Each case must be analyzed carefully so that the industrialist may know exactly and in detail what advantages or disadvantages are in store with respect to transportation. I have gone far enough into the subject to indicate that there is a great deal that the government can do to make the places chosen for industrial sites more advantageous and attractive. In similar fashion, there is a great deal to be done with respect to the development of industrial skills among the labor force. These skills in large measure are acquired from actual practical experience in industry, but education is needed first. You are already aware of our efforts to anticipate these educational needs. In addition to collaborating with other organizations and insti tutions in the establishment and expansion of vocational, engineer ing and business administration education programs, the Economic Development Administration has prepared its own training pro grams, giving special emphasis to instruction for the necessary supervisory and management personnel. The government sends students of management and industrial techniques to the United Slates to enable them to attend technical schools or serve an ap prenticeship in factories similar to the ones being established in Puerto Rico. Funds are provided to bring technicians and teachers to Puerto Rico from the United States so that they may train our supervisors and workers. In order to aid in the task of finding persons with the skills appropriate to each industry, the govern ment has an employment service, which is one of the chief respon sibilities of the Puerto Rican Department of Labor. Through the connections of that agency with the United States Employment Ser vice, key Puerto Rican personnel can be placed on the continent. The government has been especially interested in the general question of policy with respect to salaries and wages. The funda mental objective of our development program is to increase each family’s minimum income to §2,000 yearly, at the very least. If this income is to be received by a person who supports an entire family, that person must have secure employment and earn approx imately SI.00 an hour during a 40-hour week. Therefore, our funda-

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mental objective with respect to family income can be interpreted in terms of that goal of minimum earnings of S1.00 an hour. Our factories, of course, have started with a lower figure than that. Hence one of the missions of the Economic Development Administration is that of providing various types of technical and managerial assistance in order to increase productivity and help place the factories in a position to pay a minimum salary of S1.00 an hour as soon as possible. Federal government as well as Com monwealth agencies whose job it is to fix salaries are actively en deavoring to raise the minimum wage in each industry as rapidly as circumstances will permit. Therefore, vocational train ing and technical programs constitute an important and necessary aspect of the effort put forth by the Economic Development Ad ministration in order to make its “product’ as attractive as pos sible for the customer. From the foregoing it may readily be seen that industrializa tion requires more than a mere announcement in the sense that industrial sites and labor are available. The “product" offered to the industrialists should be able to compete at the outset and should be continually improved. However, it is possible that not even a high-quality “article” will be sufficient to convert an interested industrialist into a customer. Frequently, the potential client needs aid in financing his “purchase.” For this purpose, the Common wealth can call on two institutions of the first order: The Industrial Development Company and the Government Development Bank. The Industrial Development Company was mentioned earlier in regard to its principal function of developing factory sites and constructing buildings to be sold or leased to industrialists. This in itself contributes to a solution of the financing problem facing an expanding industry, since the building represents approximately 30% of the average cost of establishing and equipping such an undertaking. By having a factory building available through rental or lease, the private investor needs less fixed capital and carries a smaller risk at the beginning of the new business. At a cost in excess of 850,000,000 the Industrial Development Company has con structed more than 330 buildings covering a total in excess of six million square feet of space. This operation — whether considered primarily one of real estate development or industrial financing — is undoubtedly responsible for the existence of the majority of the manufacturing operations which currently are carried out in the industrial establishments involved. Apart from buildings, the Company provides strictly financial assistance for the new industries. During the past year approx imately S3,000,000 were lent to 27 firms to satisfy urgent short term financing needs and to provide working capital. Borrowers included manufacturing firms as well as private construction com panies engaged in factory building. Although the Company has r.t

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present some $4,000,000 in corporate bonds and mortgage loans, the primary responsibility for lending to industry rests with the Government Development Bank. Industrial Development Company loans are principally for the projects that involve more risk (and therefore are not acceptable to the banking system) but which none theless are considered of vital importance to the general develop ment plan. The Company is also authorized to make direct investments in shares of industrial firms, and its portfolio of common and pre ferred stocks at present amounts to almost $3,000,000. These di rect invetments have constituted not only an important means of encouraging the establishment of new industries, but also are ex pected to provide a part of the initial volume of stable securities necessary to strengthen the already-nascent Puerto Rican securities market. The Company provides further financial assistance for industry by underwriting special incentive subsidies, which amounted to $600,000 during the past fiscal year and contributed to the estab lishment of 38 factories. The industrialist can use these subsidies to help cover the cost of shipping machinery for this new plant, training workers, and paying the first year of rental on the build ing he occupies. Subsidies of this type are granted in those cases in which the factory is considered of particular importance to the development program; they also serve to encourage firms to estab lish in the more remote towns in the country. In general terms, the factories deemed to be of special importance within the de velopment program are those that either reinforce the existing in dustrial structure, or contribute to providing a base for other new industries. The purpose back of subsidy grants to firms which establish factories in the outlying municipalities is to cut down the flow of persons who abandon the rural zones in favor of metropoli tan areas — a direct consequence of rapid industrialization. Other wise, most of our efforts to'eliminate suburbs might well be in vain with the consequent danger that urban installations and ser vices would become seriously overburdened. The principal source of financial aid for industry furnished from public funds is the Government Development Bank, which also plays an important role in commercial and tourist trade pro jects, and serves as the fiscal agent of the Commonwealth, pub lic corporations, and municipalities. This Bank is empowered to make direct loans to private industry in the form of credits at relatively long term, which complement the short-term loans avail able from commercial banks. The bank also helps private enter prise in its negotiations with commercial banks and other financial institutions here as well as in the United Slates. The cumulative total of loans for business approved during the first thirteen years of the Bank’s history amounted to more than $52,000,000, of which

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the major portion was devoted to industrial firms and factory build ing financing. One or two years ago the Bank’s research corps undertook a study to determine the economic effects of its loans to industrial ists. At that time the Bank had disbursed approximately $20,000,000 for manufacturing firms, including 82,000.000 for in dustrial building contractors. Half the Ioans were channeled to firms belonging to local owners and the other half to companies that did not operate in Puerto Rico at the time the loan was granted. The study concluded that almost four dollars of private capital had been invested for every dollar lent by the Bank. The financial operations of the Industrial Development Com pany and the Government Development Bank provide an excellent illustration of how economic development basically comes about. The fundamental task when promoting the establishment of a new factory is to discover a satisfactory investment opportunity and to gather together every necessary facility toward that end. It often happens that the industrialist who has discovered a good project is able to contribute only a part of the essential capital. I should like to cite an example of how the Economic Development Ad ministration, the Industrial Development Company and the Govern ment Development Bank cooperated with private interests, within and without Puerto Rico, in financing a new enterprise. The firm to which 1 refer is González Chemical, which operates a factory in the town of Guanica, on the southern coast of Puerto Rico. The original capital need in this instance amounted to more than $12,000,000. The González family, which already owned and administered a fertilizer-mixing business, had only a little more than $2,000,000 to invest in the new' factory. This was considered a rather small capital contribution for an enterprise of the size involved; therefore, the Industrial Development Company decided to invest another quarter of a million dollars in common stocks, a quarter of a million in preferred shares, and three-quarters of a mil lion in first-and second-mortgage bonds. When so requested, the Government Development Bank agreed to take over the first-mort gage bonds held by a commercial bank. The Development Bank also served as intermediary in an operation whereby a Canadian bank and several U. S. insurance companies bought the remain ing first-and second-mortgage paper for 85.250.000. In effect, a Puerto Rican family, the government of Puerto Rico, Canadian and U. S. banking interests and U. S. insurance companies became partners in a single industrial enterprise that otherwise would not have been founded. Of course, not many of the firms sponsored by the Economic Development Administration are as big as González Chemical or involve the participation of so many interested parties. A five-or tcn-thousand-dollar loan based on the reputation of the individual

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or the firm, or perhaps a greater amount guaranteed by a mortgage on the machinery, are typical of government financing operations that have contributed to the establishment of many smaller factories. Most of the new factories are financed entirely from private sources, and of the total amount invested in all Economic Development Ad ministration factories, only 14% is governmental in origin. How ever, whether big or small, if a project seems to have a good chance for success, and if the businessmen who promote it are capable and reliable but lack part of the necessary capital, the Economic Development Administration stands ready to participate financially itself and to obtain economic support from others as well. You can now see that our “product” — call it industrial en vironment, if you like — consists of many elements: land for fac tories, buildings, highways, electric power, water, trained workers, supervisors, technical assistance, and a rational and express wage policy. For the customers who want the “merchandise” but can not pay cash, an “easy-payment” plan is provided. To create and continually improve this “product” is obviously the work of many government agencies. In fact, I would even go so far as to say that the “product” will not and cannot be completely good and salable without the cooperation of every government agency and the general public as well. However, to “sell” the product is primarily the responsibility of the Economic Development Administration. For this purpose offices arc maintained in the United States in New York, Chicago, Los Angeles and Miami, and in Frankfort, Germany. Here in San Juan, the Administration has a department to attend the interested persons sent by the abovementioned offices, and another devoted particularly to customers who are local residents. We have brought along samples of advertisements and types of publicity used in helping our “sales agents.” In total in the various offices we have 50 industrial rep resentatives — the name given our salesmen. In order to carry out their work they have to be very familiar with the details of what we have been discussing, namely: the Puerto Rican industrial en vironment. They also must comprehend all phases and general needs of modern industry as well as the nature of the industrial processes that are feasible in Puerto Rico. Finally, they must have a working knowledge of current business and financial practices here. The most important tool they carry in their sample cases is tax exemption for industry. The majority of the various types of manufacturing operations that did not exist in Puerto Rico in 1947, and some that did. are eligible to receive tax exemption on cor porate income for ten years and to enjoy exemption from property taxes for periods of five to ten years. Further, Puerto Rican res

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idents are exempt from personal income taxes on income received as dividends derived from earnings of a company enjoying tax ex emption, or from rent on an industrial building occupied by a taxexempt firm. We have with us copies of the Tax Exemption Law for those of you who wish to study it in detail. Our experience has shown us that the tax exemption program constitutes the most effective means of awakening interest on the part of industrialists. A recent study shows that 80% of the firms sponsored by the Economic Development Administration and cur rently operating began to explore their present projects due to some thing they heard regarding tax exemption. Moreover, 4C% of those firms reported that tax exemption was the most important factor in their decision to establish in Puerto Rico. Tax exemption can be considered somewhat in the nature of a government subsidy, but it has various advantages over other types of subsidies such as direct cash payments or protective cus toms duties: The most important advantage is that when exemp tion is granted to a firm that obtains no profits and finally fails. the government loses nothing. No income taxes would have been paid by the company in any event even if it had been subject to taxation, and whatever property taxes the government would have to forego would be more than compensated by income in the form of excise taxes and income taxes on employee earnings. Further. lax exemption requires a minimum of administration and expense: the entire budget of our Tax Exemption Office amounts to some §60,000 yearly. Tax exemption provides a solid incentive for an industrial firm to increase production and productivity, thus en abling it to pay higher wages. For their part, subsidies and pro tective tariffs tend to protect the inefficient and encourage restric tive and monopolistic practices. Another point in favor of tax ex emption is that it provides for the higbly-successful ventures a very considerable reserve of earnings that can be reinvested in rapid ex pansion. as is indeed the case of many of the factories sponsored by the Economic Development Administration. Sixteen years ago, when our industrial development was in its infancy, a well-known Puerto Rican scientist, Rafael Fernández García, was working with me in the planning and design of the factories that the Industrial Development Company was to construct and administer. Some years later even before all were in opera tion, we realized that the path we were following was very slow and laborious, and that the capital available from the government would never be sufficient for our objectives. Mr. Fernández Garcia believed that to offer lax exemption probably would attract private capital from the United States and from local investors in much greater amounts than those the government could provide, in this way giving us the inducement that our program so badly needed. Experience has shown that our colleague Fernández Garcia was

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right; and, in my personal opinion, a well-thought-out and scrupu lously administered tax exemption program is essential in attracting investment capital to a country under development. The study I mentioned before gave evidence of another fact that is assisting our selling efforts. Once interest is aroused through the publicity attendant on tax exemption and other advantages of fered by Puerto Rico, the businessmen who have successfully set up shop in the country become our best salesmen. The report of a prosperous factory, told one businessman by another, is the most convincing argument of all. In this way, the program tends to be accelerated by the motive power furnished by its own success. The next point I should like to take up is how our “product” is “sold” Io the foreign investor. The latter, in our case, almost always is a manufacturer from the United Stales. However, what I have to say applies equally to investors from Europe and Latin America. The outside investor ordinarily has an already-estab lished market for his product, all or part of the necessary capital, and a reserve of technical knowledge and managerial experience. He has at his disposal the ingredients provided by every urgentlyneeded manufacturing enterprise in a country under development. He is therefore welcomed in even the most prosperous communities. Thus, then, the investor has to choose between various communi ties or countries that compete for bis business Without going into detail with respect to the theory or practice of factory localization, it becomes obvious that the investor’s choice between alternate places will favor the areas where he can manufacture, and from which he can ship his product, for the lowest cost. Buildings, electric power, skilled labor, the means of transportation and the other elements that make up the “product” or the industrial development environment are the factors which govern his production and general transportation costs. This is the critical phase of every “sale.” Our manufacturer needs to compare the prices of each cost component in Puerto Rico with those prevailing elsewhere. One has to take him to see the factory sites and introduce him to the industrialists who manufacture his type of product or similar ones. He must also be furnished information on building rentals, wage rates, shipping costs, prices of raw materials, local market potential, etc., all relat ing to the specific product he plans to manufacture. If, after having calculated his cost components in other places the investor discovers that the total cost will probably be less in Puerto Rico, he will then enter negotiations on matters such as tax exemp tion, financial aid, rental contract, purchase of the building in particular, and factory location. To us, the signing of a rental or purchase contract of the above nature indicates that the “sale” has been made. At that moment the responsibility for the investor’s success is transferred

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from the Promotion Department to the Industrial Services Depart ment. The investor is assisted in securing the necessary permits and licenses; selecting, testing, contracting with, and training person nel; obtaining water installations, electric power and telephone ser vice; and in any other matter which will speed up the opening of the factory. Once this is done, a representative from the Economic Development Administration makes periodical inspection visits to observe the new factory in operation and, in the event some dif ficulty arises, to give advice and help solve the problem. Of the 500-some-odd factories sponsored by the Economic De velopment Administration which are presently in operation in Puer to Rico, approximately 400 belong to companies or individual in vestors who originally were established outside the country. A hundred or so Development-sponsored factories are functioning under the management of Puerto Rican owners. Development and other government agencies have put forth a concerted effort to make our industrial climate especially attractive to local investors. The latter have the additional incentive of tax exemption on personal income during a period of seven years, when such income is derived from dividends, as I mentioned earlier. Further, government financial aid, although available to all our “customers,” is granted more readily in practice to residents of the country, as is shown by the substantially higher proportion of public funds that are currently included in the assets of domestic firms. Nevertheless, despite these elements of attraction and the special efforts of the Development department that is devoted to the promotion of locally-owned industrial enterprise, factories which belong to domestic companies amount as yet to only about a fifth of the total number of Development-sponsored plants and provide jobs for approximately a tenth of the total number of workers employed by Development industries as a whole. It is well to remember here the things that the outside in vestor brings with him: a completely developed product for which an established market already exists; all the necessary capital or at least a substantial part of it; and a body of technical knowledge and managerial experience. The same may be said of some few Puerto Rican manufacturers, but, practically in every case their operations are based on the raw materials of the country (sugar. rum), a local market (fertilizer, newspaper publishing), or both (cement, glass containers). By this time you will have become weary of hearing of Puerto Rico’s lack of natural resources and the fact that, with the ex ception of very few products, our local market is too small to support economic-scale factories. W ithout doubt, we will find and exploit, additional raw materials; and the local market is growing quite rapidly. However, the number of new strictly local in dustrial opportunities of some importance that are likely to arise

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in the course of a year can hardly he expected to amount to more than five. The fields of furniture manufacturing, foodstuff proces sing, production of construction materials, the printing industry, and the few others founded on native raw materials or the local market are already overcrowded. There are some 1,600 establish ments, the majority of which are very small; almost all are owned by Puerto Ricans. This means that any significant development of Puerto Rican industrial enterprise has to take place, if it does at all, in the field of manufacturing for export. This is obviously what in vestors from outside are doing. Puerto Rican industrialists can do this only if they have access to everything that a U.S. subsidiary is in a position to offer at the outset. The Economic Develop ment Administration has undertaken to provide Puerto Rican firms with the means of placing themselves in that position in order that they can produce for the United States market and sell their merchandise there as well as in other export markets. As a partial answer to the question of what should be produced, the Economic Development Administration can call on its Industrial Research Laboratory and on the program of industrial feasibility which will be described in tomorrow’s Seminar. Last year Development subsidized the establishment of a Design Center, to assist the country’s manufacturers in designing, developing and packaging products that will be acceptable in foreign markets. An outstanding achievement of the Center was the design of furniture to be used in the United States air and naval bases which resulted in contracts let to local manufacturers in an amount which perhaps will exceed $2,000,000. A similar effort is being made to design new fashions and styles by way of assisting Puerto Rico’s extensive clothing industry. A sure market for the product is one of the most important ingredients for any business and perhaps the hardest one to provide. It is very difficult for a foreign producer to penetrate the United States market even without taking the customs barriers into consideration. Competition from large-sized firms is keen. The Economic Development Administration has a corps of special ists who conduct marketing research and advise local firms in that respect. This effort has met with a certain degree of success, particularly in the case of work contract negotiations for firms in the clothing industry. Local manufacturers have credit problems that are different in magnitude from those who have rich home offices in the United States and can count on direct or indirect access to the many specialized investment or loan institutions that have developed in that country over a period of years. It is in providing this development ingredient for Puerto Rican industry that we have made the greatest progress.

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The Industrial Development Company and the Government De velopment Bank have granted more loans to Puerto Rican-owned manufacturing firms than to those originating in the Lnited States, and the total amount disbursed has been approximately equal. In addition, short-term credits are promptly placed at the disposal of local firms by commercial banks, at interest rates only slightly higher than those prevailing in the Lnited States. As a further contribution the Economic Development Administration has also been instrumental in the establishment of a local office of the Federal Small Business Administration in Puerto Rico. This agency grants loans at low rates of interest to firms that have difficulty in obtaining adequate financing at reasonable rates from private sources. Since its establishment in Puerto Rico two years ago this office has granted nearly 200 loans, to a total of some SI.000.000. One of the biggest obstacles encountered by local firms in ob taining initial long-term financing lies in the fact that there is no market for their securities. By way of one step toward the solution of the problem, certain private interests established the Financial Investment Company, with the encouragement of the Eco nomic Development Administration. This Company is beginning to invest in local factories and has taken the first steps toward establishing a market for the direct sale of local securities. Even more recently local investors established the Metropolitan Invest ment Company, designed to operate after the manner of a mutual investment fund. Authorization for this new firm came from the Law of Investment Companies, which was promulgated for the purpose of stimulating this type of business. With respect to short-term credits, the country s industry has for a long time felt the need of assistance in the form of financing inventories and accounts receivable. Furniture manufacturers. in particular, have exhausted their working capital by extending comparatively long-term credit to retailers. To help meet this credit need, a factorage company was recently created, known as the National Credit Corporation. The funds necessary to establish this finance company were supplied for the most part by private interests in San Juan but were supplemented by a loan from the Industrial Development Company. The services of a New J ork finance company have been contracted to provide counsel and as sistance in the field of management, for the dual purpose of ac celerating and guiding the initial operations of the new enterprise. Substantial efforts have been made and will continue to be made to make a body of technical knowledge and managerial ex perience available to Puerto Rican industrialists. The efforts to expand and improve the Faculties of Engineering and Business Administration of the University of Puerto Rico have already been described, and mention has also been made of the scholarship program for training supervisors and technicians. The Industrial

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Services Department of the Economic Development Administration provides technical and administrative assistance directly to the local companies that are encountering difficulties. In those cases in which the problem is beyond the scope of Department personnel, the services of specialists are frequently contracted at its expense. Apart from this, the Industrial Services Department organizes and directs seminars, classes, and demonstrations on a great variety of technical and administrative subjects. Puerto Ricans presently occupy numerous management posts in the factories sponsored by Development, and local management personnel are growing con stantly in number and experience. Quite a few United States firms have already been established to provide consultant services in fields such as engineering, accounting, management, and advertis ing, and the Puerto Ricans who form a part of their staffs are becoming expert in their respective lines. In my judgment, several years will go by before an ap preciable number of Puerto Rican manufacturers become established in the export markets. It takes time to develop a product and the corresponding market, and to acquire technical and managerial skills — and all are essential elements for the establishment of such companies. Meanwhile, we are taking a short cut of sorts as a result of the increase in sales of our “product” to outside investors, who bring with them the necessary elements for a prosperous manufacturing enterprise. I have presented to you a rapid outline of Puerto Rico’s present industrial development. I believe that you now realize why that development is of such critical importance for Puerto Rico and understand the social purpose as well as the practical approach of the program sponsored by the Economic Development Administra tion. When describing our economic development activities, I have likened those aimed at improving the industrial environment or climate to the efforts of the manufacturer who develops and improves his product. I have compared our industrial promotion work to the advertising and selling efforts of a manufacturer. Final ly, I hope to have established a clear difference between the very different problems involved in attracting development capital from outside the country and in stimulating local enterprise and in vestment. The industrial development program of Puerto Rico is 16 years old. It has grown in size and effectiveness, having gained suf ficient maturity to become the type of operation I have described. The program had humble beginnings under very difficult wartime circumstances. As the table before you indicates (Statistics on De velopment-Sponsored Factories), only thirteen factories were established during the first five years of the program. Five of this number are substantial in size. These belong to the govern ment, and their establishment absorbed practically all the capital

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the Industrial Development Company had available at the time. Further, the subsequent operational problems of this group took up a large part of our lime, and energies. All in all at the end of five years, only 1,300 new jobs had been created, and we realized that we were traveling at too slow a pace. In December, 1947, the first tax exemptions were granted. Observe how it was not long before the establishment of factories increased from the former average of three per year to some thirty annually. By the middle of 1950 the decision had been made to sell the government-owned factories to private enterprise: the Eco nomic Development Administration had been established: promo tion offices had been opened in the United States: and plans had been drawn up for the program of constructing and leasing factory buildings belonging to the Industrial Development Company. In other words, by the time the industrial development program had been in operation eight years, it had taken the fundamental form in which it continues to function today. From the point of view of the program itself, the only important additions have been the adoption of special measures to develop domestic firms, and the realization of efforts to decentralize industrial localization. Both these endeavors began about four years ago. The first eight years were unquestionably important by way of developing a coherent plan of action and starting to build the sizeable organization called for. However, it is only since 1950 that results have been sufficient to demonstrate the wisdom of the basic approach to the problem and the practicability of the various Economic Development Administration agencies. The 500 factories sponsored by Development and currently in operation account directly or indirectly for more than 20% of Puerto Rico s net in come. In comparison, the 83 factories that were functioning about the middle of 1950 produced less than 3% of that total. Now we know that our programs produce good results: at that time we could only hope and believe that such would be the case.

VOLUME

ECONOMIC PLANNING SEMINAR October 27 — November 28, 1958

INDUSTRIAL DEVELOPMENT PLANNING LN-

PUERTO RICO By Hubert C. Barton

Director Office of Economic Research Economic Development Administration

Lecture prepared for the Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

INDUSTRIAL DEVELOPMENT PLANNING IN

PUERTO RICO By Hubert C. Barton

Director Office of Economic Research Economic Development Administration Throughout the series of lectures in this Seminar economic development has been shown to have a certain similarity with a controlling investment corporation or “holding company. It is an entity with a personality of its own. At the same time it is composed of many subsidiary bodies, each of which has its own being and purpose. Industrial development is one of these subsidiaries. Mr. Moscoso has explained why it is a particularly important subsidiary for Puerto Rico’s economic development. He has also described the techniques used and has given you a picture of the results obtained. One of the purposes of the present dis sertation is to point up the intimate relationship which should exist between industrial planning and the general plans and pro jections for economic and social development. Another aim is to indicate certain of the structural changes that occur within in dustry itself as a result of rapid industrialization and to demonstrate the type of impact which such changes have on other sectors of the economy.

We can safely assume that no one attends a meeting such as this one out of a purely academic interest in past economic events. Planning implies purpose. All of you know that the fundamental economic aim of our government is to abolish extreme poverty and raise the standard of living of our people. Your presence at these seminars is a demonstration in itself — if such were necessary — of the existence of similar aims on the part of your governments.

Although our interest is not academic in nature, it might be worthwhile at this point to consider briefly (although perhaps not very academically) what is meant by the phrase “economic de velopment capital.” We affirm that economic development is es sentially the result of investments and that the investment process is basically the same everywhere, irrespective of the many physical or political differences which exist throughout the world. The

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desirability of integrated general planning and the possibility of transferring economic development experience from one country to another both depend on the validity of this affirmation. In other words, we maintain that investment and economic development are virtually synonymous and that the process is es sentially the same, irrespective of where or under what conditions it takes place. There will probably be at least two objections to this statement. The first is that investment is so closely connected with savings that it cannot be considered a process apart. The second is that private investment and social investment are not really the same but, contrariwise, they are completely different processes. Theoretically, savings and investment are inseparable in an isolated or closed economy; nonetheless, there are various practical reasons for considering and treating them as two separate processes. One reason is that there are no isolated or closed economies in the present-day world. Both direct investment and credit go beyond national and regional frontiers. Even though one might consider the world as a closed economy, there are tremendous differences in savings accumulated from country to country, and differences also normally exist between countries in the matter of credit or capital investment yields. When we speak of national or regional economies, therefore, savings are not a prior requisite of invest ment. Of total investments in Puerto Rico in recent years one half has come from local savings and the other half from savings accumulated outside the island. A certain amount of economic development could have occurred even if the local savings figure had been negative. Another practical reason for regarding savings and investment separately is that saving goes on in practically every country of the world. The only country unable to save is one in which the high rate of mortality and the exhaustion of the land and other material resources makes it impossible for the economically-active population to produce more than it needs to subsist. The decision to save instead of consume is obviously easier for a rich country than for a poor one and for this reason it has been historically true throughout the world that “rich countries become richer and poor countries become poorer.” But this docs not necessarily have to be so. Except where people live at the minimum subsistence level, something can be saved — or borrowed. Further, if even these small savings or loans can be invested productively, people can become, if not comfortably wealthy, at least a little less poor. What part of present production can be mobilized for purposes of investment depends on a complex balance between personal, social, and political aspirations for the future on the one hand. and the current level of income and consumption on the other. Since societies, governments and corporations — not to mention

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man himself — are mortal, most decisions to restrict consump tion are in reality short-term propositions. There are techniques to convert even the shortest-term savings into investments. Take. for example, the “call money market’’ or short-term internal financing market in New York. Even in wealthy countries that have such mechanisms at their disposal, comparatively few in dividuals save. In very poor countries where these mechanisms do not exist, almost everyone has expenses in excess of his in come: i. c., he “de-saves.” Governments and businesses are re sponsible for the major part of savings in the present-day world. The third and perhaps most forceful reason for considering investment and not savings as the key and principal element in an economic development policy is the fact that the availability of funds or investment resources in no way guarantees that invest ment will actually take place and, much less, that what investments there are will be highly productive. Savings can be used for dowries, Cadillacs or palaces; they can be stored in safety deposit boxes or buried in the ground; they can be invested in destructive firms or in enterprises that are unsound. Although it seems to be of practical importance to distinguish between the savings and investment processes, a country under development faces certain dangers (also very practical) when mak ing rigid and exacting distinctions between private and social capital or private and public investment. Obviously, neither in accessible mineral deposits nor potential engineers produce anything of real value. So economic development must look to training engineers and to constructing a highway and extracting the mineral. In real life, the engineer may be educated in a private institu tion, and the ore may be extracted by a public corporation. Just what functions are appropriate to government and private enterprise, to trade unions and management, to producers and consumers, or to industry and agriculture have been classical subjects for debate. Today the facts are that the government is in business, there are businesses that run governments, labor unions own banks, agriculture is industrializing, industry is decentraliz ing, and producers and consumers turn out to be the same people. Scarcely anyone raises an eyebrow in surprise in many parts of the contemporary world if a rector of a university is introduced as a person devoted to the business of education, or if a corpora tion president trained to be a lawyer is introduced as a profes sional steel manufacturer and named a Minister of State. Harvard University is today one of the largest existing “holding companies” and controls a diverse group of industries and real estate in the United States. Two millionaires in the State of New York have been fighting over what is for them a badly-paid government job — the governorship of New York.

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This conversion of supposed antitheses or disparities into almost identical similarities is not merely a question of semantics. Active forces have been at work, and the merger is actually taking place. In the matter of capital investment, which is the topic with which we are the most immediately concerned, as an academic observer one can continue to make a distinction between government and private funds, as well as between social capital and private capital. Nevertheless, the businessman and the legislator know that any distinction between social and private capital is valid only as long as there are no changes in the tax laws or in the amount of services that the government provides by way of direct or indirect subsidies for private enterprise. Many instances can be cited of the interchange of income and capital values between the government and the private sector of the economy: taxes on earnings and sales, duties on imports of raw materials and semi finished goods, government decisions regarding the construction of public works with its own personnel instead of contracting for such construction jobs with private firms, and decisions relating to official investments in vocational education, police and fire pro tection, development of highways and ports, etc. In other words, changes in government policies or in private practices can determine whether one or all the highways, or one or all the factories, will be government business or private enterprise. It is becoming increasingly obvious to the economic planner that any distinction between social and private capital is principally the reflection of the prevailing and changing points of view as to which of the jurisdictions will utilize the resources most ef ficiently. There is some evidence and a great deal of opinion regarding the comparative efficiency of the government and private enterprise in the use of investment funds in different types of activities. However, there is common agreement that education, for example, should progress simultaneously with business: and other social needs must be looked to, also. This requires, in everyone’s view, the investment of public or private funds, or both. The source of the funds is gradually becoming secondary to the question of whether or not tbe total investment is adequate. Whether public or private interests carry out a given invest ment project can be determined almost by accident. At the end of the Second World War the government of Puerto Rico had the good fortune to obtain revenues of approximately 3150 million, representing tax collections on greatly increased sales of Puerto Rican rum made possible by a serious shortage of U. S. whiskey. The government invested this money in a bank, a hotel, electric power installations, plantations, factories and many other things which generally are considered within the field of private invest

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ment. At present public funds available for investment are relatively scarce, whereas private capital is more easily obtained. Although the public funds available for capital improvements are in great demand for highways, schools, hospitals, and other pro jects that generally are regarded as within the governmental sector. the government continues to make new investments in agri cultural and manufacturing enterprise, particularly in cases where such investments attract large amounts of private funds to new. highly-productive fields. For this reason it is sometimes said that Puerto Rico has a mixed economy — meaning that certain of the factory buildings. hotels, schools, hospitals, residences, bus lines, and wharves are private, while others that are identical in appearance and func tion belong to the State. Obviously, there is no absolute and categorical difference between social and private capital. Neither do there appear to be absolute or fixed differences between the productivity of the various production assets. If a town has a machine but no operator to run it, training an operator would probably be more productive than buying a second machine. If the children are very ill or adequately dressed for attending school, the purchase of food, medicines and clothing will be more productive than to construct more schools. In a developing econ omy there are changes, usually gradual, in the relative shortage of various types of goods and services. This leads to equallv gradual changes in the priorities corresponding to the different investments. One type of investment is more productive than another only at a given moment and under certain particular circumstances. Up to now, in our search for the meaning of "economic de velopment capital” we have identified investment, although not necessarily savings, as the source of economic growth. Further, we have maintained two additional assertions: that there is no essential economic difference between public and private investment, and that productivity differences between investments are not differences as such, but depend on their relative shortage at a given moment. On what, then, does the speed of economic growth depend? Ac cording to logic, al least, it seems to depend on the efficiency with which existing capital assets are used and the proportion of the resultant production which is reinvested in highly-produetive facilities. There are numerous fiscal and business techniques which are used to increase savings by government and private enterprise for the purpose of mobilizing sufficient resources to meet invest ment needs, which frequently are large. These techniques have already been, or will be. discussed in other lectures during this Seminar. The same is true of the technique used to forecast the

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capital goods and services that will be the most in demand and. therefore, the most productive. Although these techniques are quite varied, and although many of them have never been adequately explained, the standard whereby they should be tested and classified would appear to be their effect on investment. Hence the formulation of a valid doctrine and a practical program for economic development is apparently a conceptually simple task: that of verifying the ef ficacy of various techniques for obtaining investment capital and channelizing that capital toward the most productive uses. To comprehend fully the key function of investment within the economic development process is of immediate practical utility. It leads to rapid recognition when certain programs and specific activities are generating forces that operate jointly in the direc tion of economic growth. It also permits one to identify rapidly the irrelevant, inconsistent, and self-defeating elements that retard growth, as well as those (such as external inflation) which can bring about “desavings,” disinvestment and a reduction in real income. It might be said that the recognition of the decisive importance of the rate of investment and the efficient utilization of the resultant capital resources constitutes the point of departure in economic development planning. This does not mean that, parting from that point, a detailed plan can be formulated that will be universal in application. Techniques to be employed will vary, depending on the locality, the amount and types of natural resources available, existing institu tions, the stage of development of the country involved and many other characteristics peculiar to that nation. Generally speaking, the nature of the program and projects undertaken in a country will depend on its physical characteristics. In like fashion, the political contexture of the country will determine where managerial responsibility is to fall, and how the resultant benefits are to be distributed. If wc remember, however, that investment capital — social as well as private — is in short supply in poor countries, the economic development process appears to have a certain internal consistency and a degree of uniformity and similarity wherever it is in operation. Technical variations due to environmental dif ferences can easily be distinguished from the essential elements that determine whether the program is well conceived, or not. You will recall that one of the purposes of this paper is to demonstrate why industrial development planning should be in timately linked with planning and development efforts in other sectors of the economy and consistent with over-all plans and ob jectives. This is obvious, of course, in the immediately physical sense. A highway is needed to connect the mine and the farm with

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the factory and the market, and consumers have to have income in order to be able to buy. What is not quite so obvious is that at long term economic development capital is almost completely interchangeable. Only one change of gears in the economy is needed in order to produce one item instead of another. I have said that investment capital is not completely interchangeable since up to now only in science fiction do machines produce men. With that exception, within a given period it is possible to convert income from any source into consumer goods and services of almost unlimited variety, or into the capacity to produce almost any type of merchandise, sen ice, or clement of value imaginable — including time itself. In this way, except for short-term questions, to try to pigeonhole or separate consumption or investment into classifications of industrial or agricultural, physical or social, governmental or private, almost always results in a less efficient utilization of the capital and blocks the attainment of broader objectives. During the discussion period we shall see whether this notion of the essential universality of economic growth can be considered worthy of general acceptance and use or not. To some degree it will at least serve as a point of departure in explaining the changes which have occurred in the industrial structure of Puerto Rico and those that are likely to occur in future. Environmental factors set the stage initially and will continue to limit the speed and influence the pattern of development. However, the growth which has taken place and certain of its structural characteristics are the product of the use of capital. Allowing for environmental differences, and if our idea of the causes of economic develop ment is correct, comparable uses of capital in other countries should produce results similar to those experienced by Puerto Rico. From this point forward we will need certain data and figures to which we can make reference. (All of you present mil receive later a copy of the lists and statistics cited.) The first is a sum mary list of what appear to be the most important environmental factors affecting the development of Puerto Rican industry. Before the Seminar is over, all these characteristics of Puerto Rico will have been described and analyzed individually and in other contexts. Today we are interested only in their effect on manu facturing industries. PUERTO RICAN INDUSTRIAL ENVIRONMENT, NEAR THE YEAR 1919

Human Resources — Abundance of young workers, but un trained; average hourly rate in the factories about 1/3 the United States average. Limited number of technical and administrative personnel.

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Raw Materials — Sugar, tobacco, limestone, clay, silica. Electric Power — Competitive rates, except for large consumers; hydroelectric power potential developed to capacity; bagasse, the only locally-originated fuel. 4. Markets — Small local market; United States market practically unlimited. 5. Investment capital — No securities market; local preference for investments in commerce and real estate; government funds limited. 6. Transportation and communications — Good maritime freight service, but subject to occasional interruptions; air freight service available but very costly for most products. All areas of the island accessible via moderately good highways; telephone service limited and poor in quality. 7. Public services — Electricity, water and sewage system services available in large communities and rapidly expanding; health services excellent; educational services increasing rapidly at all levels; good police and fire protection. 8. Relations with the United States — Free interchange of persons. merchandise and currency. The Constitution of the United Slates and all its laws except those governing taxes are in force on the island. 9. Government and public attitudes — Stable government; active industrial development program; strong public support. Let us begin this short review of the industrial environment at the end of the list. The attitude of the government and the people constitutes an element of extreme importance. A poor country perhaps cannot progress, and probably will not progress economical ly to any significant degree unless economic programs are sup ported with resolve and enthusiasm. To the degree that investment is made at the expense of highly desirable and needed consump tion goods and services, painful and difficult preferences will be involved. Neither an unstable government nor an undecided people would choose the difficult uphill road instead of the pleasant stroll on level ground, or letting themselves be dragged downward. From the point of view of the foreign investor, however, the at titude of the community is as important a part of the industrial environment as raw materials and markets. At present a survey is being carried out in Puerto Rico for the purpose of re-examining this attitude in detail and determining in what aspects it is at tractive for the investor and in what respects it is not. However, there is no doubt that in the period immediately following the last world war the efforts of the government and the attitude of the people were the positive factor which exercised the greatest influence on the industrial development of the island. In the questionnaires on reasons which induced industrialists to

2. 3.

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establish new factories, tax exemption ranks first. This is obviously an environmental factor which any country can have and, if it is a poor country, it will probably have to offer such exemption if it wants to attract outside capital and channelize a greater propor tion of internal capital to manufacturing. Working upward on the list, the relationship between Puerto Rico and the United States by 1949 was unique, and its effect on industrial development has been profound and for the most part favorable. Approximately 80% of private investment in new in dustries comes from the United States, and a similar proportion of new production is sold in the L. S. market. In Puerto Rico customs protection against the most powerful industrial nation is out of the question. Every export industry has to compete — usually at a disadvantage — in the matter of transportation costs. Industries selling to the local market are protected only by the additional transportation costs which accrue to imported products. Later we shall see how the enforcement in Puerto Rico of the Federal Minimum Wage Act caused a much more rapid increase in industrial wages than in other sectors of the economy or in United States manufacturing industries themselves. This has af fected the structure as well as the degree of growth of industry in Puerto Rico. Another positive element: the quality of the public services on which the subsequent and rapid industrial expansion was founded was in large measure the result of the investment of federal government funds here and of a transplanting of its forms of or ganization and procedures, and scientific technology. In a certain sense those services had already been paid for — perhaps more than paid for — by the previous economic exploitation of Puer to Rico by United States commercial interests. During the greater part of the period between 1910 and 1910. Puerto Rico had a ‘■favorable” balance of payments with the I nited States, which is another way of saying that U. S. interests took out more from the island in the form of products than they paid to it in the form of consumer goods and new investment. However, they did leave a legacy of relatively good public services -without which a substantial industrial growth would have been practically impos sible. The first six environmental factors which appear on the list, rather than representing conditions of industrial growth, have been influences on the pattern which that growth has followed and the resultant industrial structure. On examining them, one would ex pect to find that manufacturing industries existing in 1919 were intensive from the standpoint of labor rather than capital; used largely raw materials or semi-finished goods brought in from abroad: were not heavy consumers of power or fuel; those that

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sold in the local market were usually small in size and those that sold to the U.S. market were founded on sugar or tobacco or had very low transportation costs compared to the cost of labor and other production and sales costs. Immediately following the list of environmental factors you will find a statistical table based on information from the 1949 and 1951 censuses. (Reference p. 17-a.) You will note that in 1919 there was a total of some 2,000 (1,998) manufacturing establishments in Puerto Rico. At the end of the table it is shown that the majority of these (65%) were very small, having less than 10 employees and producing on an average a “value added by manufacturing” of only S3,500 per year, approximately. These small establishments produced for the most part cigarettes, bakery goods, and furniture. Except for a few of the cigarette manufacturers, these firms sold exclusively on the local market. Capital investment in these concerns was very small; they paid very low salaries: and suffered a high mortality rate. This group of 1,300 (1,299) very small factories were responsible for less than 5% of industrial production and employed less than 5% of the total working force. At the other end of the scale, 41 sugar refineries, 42 tobacco stripping plants (included in the total for tobacco) and 65 De velopment-sponsored factories — a total of 148 factories producing chiefly for export — accounted for more than half (852 million) of total production (in terms of added value). Sugar refineries and tobacco stripping plants enjoy a certain degree of protection in the United Slates market, but their expan sion is limited by quotas and restrictions on production. For this reason, their production in 1954 was approximately the same as it had been in 1949. On the other hand, in the Developmentsponsored factories, production increased almost S55 million in the five-year period. By 1954 Development-sponsored plants were responsible for more than a third of total production, in com parison with less than one-fifth five years before. The expansion of the 6 industrial groups that sold principally to the local market more or less kept pace with the expansion in local consumer de mand. The greatest success was had by the group with a high capital investment, composed of manufacturers of cement, clay products, and glass and paper containers. These firms were sold by the government to private interests during the period mentioned. They were based on local raw materials, including waste paper, and sold to the construction and rum industries, that were undergoing rapid expansion. Turning now to the next table on national income derived from manufacturing — on which there arc up-to-date estimates — it is evident that the trends observed between 1949 and 1954 have

2.854 2.338 3,670 2,731 16,300

76 186 77 7 413 93,421 10.000(e) 83,421 (ej 88,801. 4,617

16,728 6,353

485 87

1,998 65 1,933 699 1,299

6,743 35,704

626 41

Number of Factories

1919

188.523 65,493 103.030 180.603 7,920

5,451 5,739 4.428 3.683 76.559

37,665 9,445

11.619 33,943

Manufacture ($000)

1954 Value added

•15.7 * 21.6 51.1' n.n. n.n.

72.2 99.5 95.9 99.0 22.8

28.3 25.8

% of sales made in Puerto Rico

However, (hey are probably similar to the percent-

2,190 281. 1,906 911 1,279

70 202 93 7 678

460 132

511 37

Number of Factories

1 'l liese percentages refer to tax-exempt and non-exempt establishment ages corresponding to Development and non-Devclopment factories.

TOTAL Development Factories Others 10, or more, workers Less than 10 workers

Tobacco Sugar Other foodstuffs, beverages Stone, clay, glass Men’s and boy’s clothing Furniture Printing Fertilizer Others

Industry or Group

Value added by Manufacture (§000)

(Based on data obtained from the 1954 Manufacturing Census)

MANUFACTURING INDUSTRY: INDUSTRIAL BRANCHES AND PLANT SIZE

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continued. During the last eight years income from manufacturing has increased 160%, or more than one time and a half. The fiscal year 1955-1956 marked the first time that manufacturing income exceeded that derived from agriculture. The $231 million total for the last-mentioned year compares with the total for agri culture of only $155 million. NATIONAL INCOME FROM MANUFACTURING (in millions of dollars) Fiscal year

Developmentsponsored factories

1950 8,2 1951 12.6 1952 17.8 30.6 1953 1954 45.4 1955 55.1 73.2 1956 95.4 1957 112.2 1958 Increase since 1950 1,368%

Sugar; Tobacco Processing

Other factories

All factories

34.3 38.4 38.4 36.5 37.6 35.1 34.7 29.4 27.1

46.2 54.8 39.2 70.0 67.4 68.7 76.7 89.0 91.6

88.7 105.8 115.4 137.1 150.4 158.9 184.6 213.8 230.9

—21%

98%

160%

Development-sponsored plants have produced the greater part of the income from manufacturing. Income attributable to the sugar refineries and tobacco processing plants has been declining since 1952, and sharply during the last two years, in which the sugar crop has been adversely affected by a hurricane, a drought, and this year by excessive rain. The “other” factories, principally the numerous small ones that produce for the local market, have ex panded jointly with the growing income of the consumer. However, growth in Development-sponsored factories has been much more rapid. Al present these account for approximately half the manu facturing production carried out in Puerto Rico. Il is worthwhile to examine the nature of the Developmentsponsored factories in detail. As the table indicates, these are by far the most dynamic element in the field of manufacturing in Puerto Rico. In fact, they have been largely responsible, directly or indirectly, for the growth of our economy in recent years. Il is even more worthwhile to observe the industrial structure of these factories since their establishment in a majority of cases was in defiance of one of the basic principles of the theory of factory localization. As we have already seen, the local market is not large enough to sustain the greater part of the manufacturing industries. There

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are a few industries that use local raw materials so bulky that it is necessary to reduce them in size at their point of origin. Thus we have the sugar refineries located on the sugar plantations, and the cement plants right alongside the limestone deposits. There are industries that are market-oriented, such as the bakeries, whose customers demand hot bread delivered fresh in the morning. Bakery establishments therefore usually consist of small outlets that are frequently located in, or near, residential areas. In larger markets, mass production economies give rise to larger factories, such as the steel mills that transport the ore at low cost in barges, or the bakeries that distribute their products through the use of truck fleets. However, the factory location which is ordinarily preferred is that which is near the raw material supply, in some cases, or as near as possible to a large and concentrated market. This enables them to combine less bulky raw materials, transporting them from a certain distance, and provide rapid delivery service for the consumer. Within the United Stales market, of which Puerto Rico is a part, the majority of Development-sponsored factories are in no position to do either of the foregoing (i.e., short hauls of moderately bulky raw materials or rapid delivery service of the finished product). Most of the time they are in the worst possible loca tion: namely, an intermediate point between the raw materials and the market. Typically they import raw materials or semi-finished goods and export semi-finished or consumer goods. For this reason transportation costs are ordinarily a larger component of the total cost in the case of a factory located in Puerto Rico than in a similar plant situated at some point in the United Stales. Unless there were something to compensate for this higher transportation cost, island factories could not compete with those located in the United States. The lower labor costs are ordinarily the ones that provide such compensation. Wages in the manu facturing sector are at present approximately 40% of the I nited Stales average, and since the differences in productivity are much less, most of the wage differential results in lower labor costs. 1 luis, the differences between transportation and labor costs consti tute the principal determining factor of total cost variations be tween factories operating on the island and similar ones in the United States. This means that a product intended for sale on the local market must pay high maritime freight in relation to its total value as in the case of cement packed in bags. The contrary is true in the case of a product made in Puerto Rice and sold in the United States: The labor cost should be high and the transportation cost low’ in relation to the price of the delivered product. Classic examples are women's clothing, particularly lingerie, and small electrical and mechanical appliances.

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By 1949 most of the products that enjoy “natural” protection in the local market were being produced in Puerto Rico and, as we have seen, production in these industries has increased almost as rapidly — but not more rapidly — than the expansion in local consumer demand. Most of the growth has occurred in the case of the types of products for export that most easily could over come the transportation barrier. Today there are some 200 dif ferent products that are produced in Puerto Rico from imported raw materials and sold in the United States market. In the majority of cases the economic feasibility of these undertakings depends on having a combination of sufficiently low wage scales and suf ficiently high productivity to compensate for additional transporta tion costs.

Now is the time to remember that the basic objective of Puer to Rico’s economic development is to increase family income. It is true that factory worker wages have increased more rapidly during recent years than incomes in any other sector of the econ omy, and also faster than factory wages have risen in the United States. However, the transportation disadvantage would appear to be an insurmountable obstacle which wotdd keep factory worker income in Puerto Rico from ever approximating income levels prevailing in the United States. However, economic “laws” can be evaded, if not completely broken. One way of doing so would be to increase efficiency and reduce costs in the matter of transporta tion. In a later lecture during the Seminar you will hear something regarding the efforts put forth with that view in mind. Another way would be to avoid transportation itself by means of integration. In simple terms, industrial integration means that two factories have only two transportation costs, one incoming and the other outgoing. On the other hand, two non-integrated factories have four such costs, one income and one outgoing for each plant. Before explaining the conscious efforts that are being made to achieve a certain degree of integration within the industrial structure of Puerto Rico, it is necessary to examine the changing industrial composition of Development-sponsored factories and the effect of various factors thereon, particularly the rapid increases in minimum wages. The following table takes up this point:

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INDUSTRIAL COMPOSITION OF DEVELOPMENT — SPONSORED FACTORIES

Employment, factories in operation June, 1953 June, 1958

Potential employment, factories in process of establishment

Foodstuffs 1.1 Tobacco 0.8 Textiles 13.8 Clothing 35.5 Lumber and furniture 0.3 Paper and printing 1.9 Chemical and petroleum products 0.7 Rubber and leather goods 11.8 Stone, clay and glass products 9.5 Metal products, machinery instruments 12.8 Miscellaneous 11.8 100.0

1.2 3.7 11.9 34.3 1.6 1.1

10.3 — 4.4 10.9 7.4 6.9

4.0

11.8

11.3

9.4

5.0

7.9

15.6 10.0 100.0

24.8 6.2 100.0

Industrial group

With respect to number of jobs, the clothing industry is and has always been, the most important by far in the Development-sponsored program. To date that industry has consistently employed more than one-third the workers in all Development factories. By the same token, it has contributed slightly more than a third of the total increase in employment. Among the 20 manufacturing industry groups as defined in the Standard Industrial Classification Manual. textiles have been second in importance, contributing approximate ly one-seventh of the total employment. Within each of these two industrial groups, which together are responsible for almost half the jobs made available in De velopment sponsored factories, a certain amount of integration has been taking place in recent years. Straps and other accessories for bras are being produced. Factories have been established for dyeing textiles, and recently one was set up to make a type of yarn used by six local producers of coats. However, it is still true that textile factories sell the bulk of their production in the United States while garment manufacturers purchase the greater part of their raw materials outside the island. Thus, both industries incur external transportation costs on the greater part of their raw materials as well as their finished products. Although their transportation costs are

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a relatively small part of their total costs, which explains in part their present importance in Puerto Rico, because of their lack of integra tion these two industries have suffered doubly the effects of the re cent drastic increases in maritime freight charges between the island and the United States. Moreover, both industries — but in particular the garment manufacturers — have also been adversely affected by substantial increases in minimum wages. Even though such increases have been as high, or higher, in other industries, the effects thereof have been the most marked in the case of textiles and clothing. The principal competitors of the two industries are the southern states of the United States, characterized by relatively low wage rates, and Hong Kong and the Philippines where wage scales are extreme ly low. lhe competitive situation in South Carolina, a typical southern state of the U. S., is depicted in the brief tabulation fol lowing: Annual or monthly average

Average hourly wage rate South Carolina Puerto Rico Clothing Textiles Textiles Clothin'

1950 1954 1956 1958 (June) Increase since: 1950 1956

81.18 1.28 1.37 1.42

S .88 .97 1.11 1.14

8 .39 .49 .64 .85

8 .31 .40 .57 .73

.24 .05

.26 .03

.46 .21

.42 .16

Particularly during the last two years lhe increase in the aver age hourly wage rate has been much more rapid in the textile and clothing industries in Puerto Rico than in their counterparts in South Carolina (210 and 160 per hour, respectively, compared with 50 and 30). This reduction in the competitive advantage that for merly accrued to wage rates, coupled with the aggravated disad vantage of freight rate increases, is doubtlessly responsible for the situation reflected in the earlier table: Among factories currently being established, textile and clothing firms account for a much lower proportion of jobs than is the case with factories already in operation. In international trade terms, clothing has been the sector of Puerto Rican industry which has had the greatest competitive ad vantage over the United States. This advantage has been greatly reduced, and in the case of certain items it has ceased to exist entirely. Although negative, this situation should be broadly sig nificant for all countries in process of development.

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Few arcas in the world that are under development are posses sed of sufficient natural resources to achieve high standards of liv ing without participating in foreign trade. Even those with abun dant natural resources can progress more rapidly if they export what they can most economically produce in exchange for capital and consumer goods that arc not yet locally manufactured. Only in the folio wing manner can a Latin American country (Puerto Rico) or a southern slate in the United Stales come anywhere near achieving the average income level of the U. S.: by exporting the limited variety of raw materials and manufactures locally produced in such drastically expanded quantities that the importation of a wide variety of products can be financed. In addition, the value of exports must increase more rapidly than does the Lnited States national income. If such a country or slate is unable to increase the small variety of exports speedily, it will not be in a position to finance the importation of sufficient consumer and capital goods to reduce the difference between income levels. Thus, exports of textiles and other products from the southern part of the Lnited States, as well as exports of clothing and other “new'’ products from Puerto Rico have had to increase at an extremely rapid pace in order to reach income and standard of living level increments that have been only modestly larger than those that occurred in the United States as a whole. For high-income areas, such as the northeastern industrial sec tor of the United Stales, the foregoing process creates severe com petition and lowers production in its traditional garment and tex tile industries. This competition is quite evident and ordinarily generates resistance on the part of civic groups and worker and industrial organizations. New demand for other products could compensate for the foregoing effects. However, although the mag nitude of this new demand could be greater, it is so dispersed among so many products — from automobiles to rouge — that it is gen erally impossible to identify its origin. These new sales opportuni ties do not build up much support for the industrial specialization in process. International events would appear to indicate that this in dustrial specialization process is occurring in a very few countries only. In our hemisphere, Canada. Mexico and Puerto Rico are those that probably have narrowed the difference between their respective standards of living and the rising standard of living in the United States. There may be other countries, but in general the difference in incomes between the wealthy Lnited States and the poor countries of the world has probably become greater dur ing the last two decades. Puerto Rico’s progress was due in large measure to the rapid expansion of the clothing industry which now seems destined to

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expand more slowly. Toward what areas, then, were we to guide our efforts? The first answer to this question was: toward industries manufacturing electronic products, light machinery and plastics. In those cases wages in Puerto Rico are already relatively high and therefore less subject to increase via administrative dispositions. Further, compelí lion with those types of manufacturing enterprise derives principally from the highest-wage areas in the United States. The expansion which has occurred in the industries turning out metal products, machinery, and scientific instruments, plus the many potential jobs open in those types of factories which are cur rently being established (see table on industrial composition) is very significant and encouraging. In comparison with the garment industry, the above mentioned factories arc characterized by more complicated industrial processes and a higher investment per work er. The range of products they cover is very broad, which has enabled a greater degree of internal integration; and substantially more of such integration appears to be possible in future. For these reasons plants falling within those industrial groups can or dinarily pay higher wages than the garment industry and should be able to compete more favorably with wage rates common to the southern part of the United States. Because of the expansion and integration potential of these industries, a study is being conducted currently of their raw materials, machinery, products and markets, to serve as the basis for special promotional efforts here as well as in the United States. If successful, these efforts will at least compensate for the promotional difficulties that are expected to continue in the case of the clothing industry. However, I would say that much greater long-term significance attaches to the .conscious effort currently being pul forth to create industrial opportunities instead of merely promoting those in dustries that momentarily seem to have the greatest expansion pos sibilities in Puerto Rico. The basis for this effort is a research program, to date very limited in scope, which has been given the name “Industrial Feasibility Studies.” The fact that the program is founded on studies and research projects does not mean that it is divorced from the promotional organization and techniques which to date have formed the backbone of our industrial development activities. Rather it represents an effort to feed into existing pro motional machinery new information on new possibilities that will produce greater yields than those obtained to date. The phrase “Industrial Feasibility Studies or Research” has become quite familiar to all those who are devoted to industrial development work in Puerto Rico and elsewhere. Unfortunately, the phrase is much better known than the objectives sought by the program, the research methods used, and the results that are obtainable or have already been achieved. Many seem to have the

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mistaken idea that the industrial feasibility studies are some sort of new or magic invention. As a research technique feasibility studies are very similar to the work carried out by large industrial concerns when develop ing new products and markets. Investment banks and foreign aid institutions also undertake similar studies when examining the ad visability of subscribing to projected securities issues for financing new firms. Analogous research concepts and techniques are em ployed in the international trade theory and in academic investiga tion regarding industrial localization. However, the industrial feasibility studies carried out by the Economic Development Administration are different in one respect from similar projects carried out elsewhere and for different pur poses: They take an over-all approach to the country's economy, searching out within it opportunities for new industrial enterprise which will broaden the base of that economy, strengthen its internal structure, and increase its possibilites for natural and dynamic de velopment and growth. In Puerto Rico the logical point of departure for such studies was to investigate the possibilities, however small, of taking ad vantage of natural resources that have not yet been developed. In Costa Rica, and even moreso in British and Dutch Guiana, where natural resources are clearly the abundant element, such studies most probably would have concentrated primarily on problems of labor, necessary capital, or technology. In our case, however, natural resources are the item in shortest supply. The first phase of the feasibility studies on natural resources has been definitely successful, even though in certain cases the new development areas opened have been rather small. Let us take a look at two examples: marble, and sugar cane bagasse. Marble deposits in Puerto Rico have been known for a long time in a geological sense. It became necessary, however, to bring to Puerto Rico an elderly gentleman who had spent his life evaluating marble deposits. He discovered that our deposits appeared to have a certain commercial value. Small samples compared favorably in appearance with recognized Italian and U. S. varieties. Thereafter, it was necessary to excavate larger blocks in order to determine ex traction costs and the quality of the marble in point of cut and fin ish. All this sounds easy, but it took 3-1/2 years before we could know’ enough to be sure of the feasibility of establishing a marble industry in Puerto Rico. Sugar cane bagasse also represented a raw material in abun dant supply — this time, a fiber. The characteristics of this material are well known as a result of years of investigation in our indus trial laboratory and in the laboratories of other countries. The problem was one of procedure: how to convert bagasse into paper

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or any of the types of pressboard used for construction, in such way that these end products could compete with those made from wood pulp. We proceeded in this case to get together all avail able data on bagasse production and the price which would have to be offered to the sugar refineries in order to induce them to switch from bagasse to fuel oil. We also explored the markets here and in the United States for certain of the possible end products. Several U. S. companies, aware of the prevailing shortage of wood fiber, have been studying the situation. One of these, the W. R. Grace Company, is at present constructing an S8-million paper mill next to a government sugar refinery and also close by a container manufacturer which the Grace people already bought with a view to utilizing a part of the production from the new paper mill. Proj ects are also under consideration for the manufacture of press board for construction. Puerto Rico’s forest resources are very small, compared with those of other countries. This fact did not prevent the discovery of a more valuable use for them than fuel. Studies were made on the problems of sawing the tree trunks and cutting the lumber, and on the demand for this product by local furniture manufacturers who theretofore had been importing lumber in large amounts. The establishment of a sawmill was the outcome of the interest of a prospective investor in producing prefabricated panels made from cement reinforced with wood shavings, for construction use. It was expensive to import logs for use in producing wood shavings, and prior studies had shown that one of the native varieties of trees (yagrumo) could be adapted for the purpose and would also serve for model airplane construction instead of the imported balsa wood being used by a locally-established manufacturer. Earlier research conducted by the Forestry Service and the Economic Development Administration had demonstrated that to saw and sell yagrumo was a necessary prerequisite to the economic exploitation of wood for furniture, for which there was a large potential market and which would considerably strengthen the furniture industry that had pre viously had to depend on costly imported woods. Apart from the integration effects outlined above, the sawmill is already provid ing a new source of income for agriculturalists living in the lowestincome areas on the island. These persons were so unfamiliar with modern techniques that it was necessary for the sawmill, in coopera tion with the Department of Agriculture, the Forestry Service, and the Economic Development Administration, to give demonstrations and training to the agriculturalists regarding proper use of the necessary equipment. In the next case we studied a raw material — oil — which. although not local in origin could be imported efficiently in tank ers. For a brief time we thought that we had come across some

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thing of sufficient importance to solve most of Puerto Rico’s eco nomic problem. A small oil refinery was already in operation. Its success was due to a fuel oil contract with the Water Resources Authority, in combination with the substantial local demand for automobile gasoline. Another much larger refinery was established by individuals whose principal interest probably was owing to the tax exemption granted them on a property valued at many millions of dollars. Our own studies up to that moment had shown that these refineries, based on imports of Venezuelan oil, were not only feasible on their own merits, but could form the basis for an in dustry manufacturing petroleum by-products. They could further supply synthetic fiber for our textile and garment manufacturers, as well as plastic raw materials for many other Puerto Rican in dustries. However, the realization of this dream of the integral solution of many of Puerto Rico’s economic problems will not be possible, at least for several years, as a result of the restrictions placed on the importation of foreign oil, including that from A enezuela. Without such importation, no Puerto Rican refinery could expect to operate. Our final example of planned economic opportunities is a project for a wheat flour and feed mill which also depends on bulk imports of a raw material but which has an economic potential of large and surprising proportions stemming from its integration with our agriculture and various other industrial activities. The diagram before you outlines certain of the principal elements of this new industrial complex. Studies made since the early days of the Development program on the feasibility of establishing a flour mill as such had resulted in consistently negative conclusions. Given the surplus productive capacity of the United States, the relative advantage of shipping wheat in bulk instead of flour in sacks was not sufficient to induce any U. S. industrialist to run the risks involved. The feasibility of the project rests on a much broader base of an industrial and agricultural complex to include the manufacture of animal feed, increased production of livestock, hogs and poultry, and a modern meat-packing plant. Transportation economies that can result from this huge project can amount to as much as the difference between maritime freight on bulk wheat ($12 per 3 tons) and on refrigerated meat ($60 per ton). Further, the estab lishment of the flour and feed mill will open a series of industrial opportunities, most of which are indicated on the diagram. Although all the elements shown in the diagram, with the ex ception of the slaughterhouse, were in operation or under construc tion by June, 1958. several years will go by before the complete impact is felt. New promotional opportunities continue to arise; there is for example, the case of a possible factory for the produc tion of burlap sacks or bags.

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The complete scope and economic significance of this industrial complex are evidenced more clearly from its income-producing capacity than from the intricate interrelations between its compon ent parts. Preliminary estimates included in the diagram show an addition of 3175 million to Puerto Rican production, a large part of which will derive from agriculture. This additional gross produc tion is equivalent to approximately 3150 million in national income in primary sectors of the economy, which we estimate will generate another 8150 million in income in secondary sectors such as trade, transportation and services. If these estimates materialize, some where around 1965, national income will have increased by 8300 million, an amount substantially higher than the income presently generated by all the Development-sponsored programs combined. We have observed five examples of integrated industrial de velopment: marble, used directly or as a finishing material, prin cipally by the construction industry; bagasse, for the production of pulp, paper, pressboard and containers; forestry products, for use as construction materials and in the manufacture of furniture and other wood products; imported oil, for motor fuel, lubricants, fuel for generating electric potver, and gases for a variety of syn thetic materials and petrochemical products; and, finally, imported grain to produce wheat flower, animal feed, meats, canned fish and a wide variety of farm products. These planned industrial op portunities have several things in common. Each brings about an economy in transportation costs and an increase in Puerto Rican production. Each enjoys a local market and export possibilities. In every instance some earlier aspect of economic development paved the way for the key integrating investment which, in turn, a wide variety of farm products. These planned industrial opopened new opportunities. In each case, the stimulating effects extend beyond the field of manufacturing, reaching as far as the construction industries, electric power production, and the service sectors of the economy. There is a very obvious contrast between the economic effect of this type of integral development and that corresponding to the promotion of individual factories whose sources of raw materials and markets are outside Puerto Rico. If there are 30 bra factories, to add one more will provide some jobs and some additional de mand for services from other industries. However, it will not give any added stimulus to the development of new primary sources of income from manufacturing, agriculture or mining. In the case of the industrial and agricultural complexes, on the other hand, one primary industry stimulates another, and the whole generates a con siderably greater demand for the products of secondary industries and for services. However, it should be pointed out that a certain industrial base is required before integration can begin. The two processes

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of industrial development and integration are not separate but sup plementary. At the beginning, integration possibilities are few in number, but they become more and more numerous as the com bined process goes forward. Returning now to our initial theme of economic development capita], let us look at Table 6 of the statistical appendix. Observe the diminishing importance of the role of government capital: In 1951 it accounted for about one-third of the total: today it rep resents less than one-seventh. Obviously, development is being fi nanced principally by private capital, four-fifths of which has come from the United States, with the remaining fifth supplied by Puerto Rican investors. In a way the most significant column in the table is the last one, for it indicates an increasingly high proportion of capital in the industrial development program. You will note that in 1951 and 1952 the average per worker amounted to S6,000, a relatively high level reflecting the importance of the highly-capitalized factor ies producing cement, glass containers, cardbord and clay products. These were originally constructed by the government. In the fol lowing two years this average declined as a result of the rapid establishment of a large number of factories having a high propor tion of labor, particularly in the garment or dressmaking industry where the investment per employee, including accumulated sur pluses, even now amounts to only approximately 34,000. The rapid increase in investment per employee since 1955 is due primarily to some few highly-capitalized projects, such as the two oil refineries and the ammonia plant in which the capital invested per employee is as high as $80,000. The 1958 average does not include other highly-capitalized projects currently under construction, such as the ethylic glycol plant, expanded installations at the refineries, the flour and feed mill, and the factory for producing paper from bagasse. By I960 the average will probably amount to some 311,000 per worker, or very similar to that prevailing in the United States. There is obviously a great deal of dependence on capital — and in Puerto Rico’s case, on private capital. — for economic de velopment and growth. Industrial feasibility studies, direct gov ernment investments in industrial buildings, loans, and other efforts all have been for the express purpose of generating greater private investment. This not only has the obvious advantage of insuring greater investments and therefore greater growth than that which the government could achieve with its own limited resources; it also has the less evident advantage of providing net income for the Treasury instead of constituting a fiscal burden. For those of you who arc interested in the details of the auto financing of the industrial development program, I would recoin-

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mend a study entitled “Costs and Benefits of the Development Programs.” The basic estimates used in that study appear in the first three tables in the statistical appendix made available to you. The study on costs and benefits shows that after allowing for the effects of lax exemption, our Treasury receives approximately 14% of the national income generated by the Development-sponsored programs (8250,334,000 in 1958, as shown near the end of Table 3) in the form of personal income taxes, excise taxes, and other revenues. In the fiscal year ended in June, 1958, the amount of rev enues attributable to Development-sponsored projects reached the 835-million mark. If we add to that figure 89 million in direct taxes on shipments of rum and cigarettes and on petroleum im ports, we have a total of 844 million in Treasury revenues as a result of an S8-million investment by the Economic Development Administration. (See bottom of column at right-hand side of Table ) 1. A yield of 5 to 1, or more than 500% annually, would appear to be good business. Very few factories could do a better job.

ECONOMIC PLANNING SEMINAR

October 27 — November 28, 1958

LOCALIZATION PROBLEMS - ESSENTIAL REQUISITES FOR THE LOCALIZATION OF INDUSTRIES AND INDUSTRIAL COMPLEXES

By Rubén Sánchez

Vice President of Development Industrial Development Company of Puerto Rico

Lecture prepared for the Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

LOCALIZATION PROBLEMS - ESSENTIAL REQUISITES FOR THE LOCALIZATION OF INDUSTRIES AND INDUSTRIAL COMPLEXES By Rubén Sánchez

Vice President oj Development Industrial Development Company oj Puerto Rico

I am grateful for the opportunity to acquaint you with the methodology used by the Industrial Development Company of Puerto Rico in localizing industrial enterprise on our island. My topic for discussion covers the factors which determine the location of industrial concerns, giving emphasis to those related with the physical plant itself and the operation of the industrial firm involved. Before going into my subject at lenght, I should like to out line briefly the development of the Industrial Program in Puerto Rico. Origin and Purpose of the Program

Puerto Rico has very few natural resources. We have no oil, large forests, or mineral wealth. Although our island is small — it has an area of only 3,435 square miles — its population density is nonetheless one of the highest in the world: about 650 inhabitants per square mile. Our government, aware that our agricultural economy was not sufficient to resolve our problems and substantially improve the standards of living of our people, undertook an industrialization program aimed at creating new sources of wealth and production. This program has been commended principally to the Economic De velopment Administration. Our industrial program has gone through two stages of de velopment. The first covers the period from 1912 to 1950, in which emphasis was placed on the establishment and operation of man ufacturing firms under the Industrial Development Company. The objective was to satisfy the urgent needs of our economy, endeavor ing at the same time to convince private initiative of our capacity for industrial enterprise, which up to then had been limited. The second stage comprises the period in which the establishment and

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operation of industrial concerns fell largely to private interests, as sisted and guided by the government. The second stage began with the creation of the Economic Development Administration, which has under its jurisdiction the Industrial Development Com pany and the Port Authority and is in charge of promotion activi ties, including encouragement of the tourist trade. In the course of the development of this program various measures have been taken to facilitate the promotion and estab lishment of industries in Puerto Rico. Efforts aimed at creating the conditions required by industry for its adequate functioning constitute an essential part of the program. We analyze below the factors that must be taken into account in this respect, as well as the methodology worked out by the Industrial Development Com pany, which carries the primary responsibility for the development of facilities to foster industrial program progress in Puerto Rico. Localization Factors

A large part of the success of an industrial firm depends on location. The propitious selection of such a site requires careful study in order to determine whether the requisite factors related to the adequate functioning of the enterprise are indeed present. The nature and importance of the factors that influence industry localization vary according to the type of industry involved and the technical and economic conditions it calls for. Among the basic economic and physical factors which must be taken into considera tion when studying the localization of any industrial firm the fol lowing are worthy of mention: available labor raw materials transportation physical plant and equipment requirements fuel, power, water, and industrial waste disposal facilities 6. markets 7. growth potential 8. wage scales 9. incentives for facilitating industrial development 10. social facilities 1. 2. 3. 4. 5.

Another highly important element in the selection of industrial sites is government policy as regards the pattern of economic de velopment, and with respect to the industries which best contribute to the achievement of the objectives of the industrial program. Final ly, an effort should be made to find localities in which the citizenry has created a climate favorable to industrialization.

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The Industrial Development Company, on the basis of ex perience obtained in the early years of operation of the Industrial Program of Puerto Rico and a compilation of essential basic data on the aforementioned factors, has adopted various types of instru ments. These enable the industrialist as well as the Company to make a wise selection of the sites best suited for industrial enter prise, and where the latter will contribute in greatest degree to Puerto Rico’s balanced development. These instruments, which will be described later in detail, are as follows: the Plan for the Management of Physical Facili ties for Industry, Programs for Land Purchases for Industrial Pur poses, Industrial Urbanization Construction Programs, Programs for the Construction of Typical Industrial Buildings, and Programs for the Construction of Specialized Industrial Buildings. In Puerto Rico’s experience the localization factors that have exerted the most influence on the development of our industrial program have been transportation facilities, the availability of elec tric power and water, and abundance of labor, social facilities for industrialists and the workers, and incentives offered by our gov ernment to facilitate the industrial development of the island. Let us consider these factors briefly. Transportation'. Transportation is an essential factor in a country’s industrial development. Industry requires railroad and highway facilities and others that will permit efficient transporta tion of the raw materials to the factory and of the finished product to sources of distribution, both within and without the country. Puerto Rico has a splendid highway network making almost any point on the island of easy access. Some of these roads, how ever, need to be improved so that they will be in condition to ex pedite the movement of modern transit which daily requires greater facilities. Our experience has been that regions equipped with modern transportation lines have witnessed a more rapid industrial development than those whose feeder roads do not meet the stand ards called for by present-day transit. Our government has not failed to recognize the importance of this fact and has drawn up an integral plan for highway construction and improvement that should facilitate the establishment of industries at any point on the island and thus contribute to better balance in our economic de velopment. With this aim in mind greater priority is given to con struction and improvement programs for those highways which fa cilitate transit to the most important regional centers, in line with the plan for balanced regional development in Puerto Rico, form ulated by the Planning Board. On the one hand we can count on the foregoing quite adequate means of transportation. However, external transportation puts us at a serious disadvantage with respect to industrial promotion, ow ing to the distance that separates the island from our best market,

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the United States. Contributing elements in this case include the increasing cost o£ maritime freight, the time required for ship trans portation to and from the United States, and the problems created by waterfront strikes which have been frequent in recent years. The latter have resulted in work stoppages on the docks, both in Puerto Rico and the United States. It should be pointed out, however, that in the measure progress is achieved in the integration of our industrial development and in the manufacture of products in Puerto Rico for use by other estab lished industries, the transportation problem as regards raw materials is being solved. Examples would be the two oil refineries that will supply raw materials for other industries (such as petrochemical producers), the plant manufacturing synthetic fibers, and other sim ilar undertakings. The products of the last-mentioned companies, in turn, are used for other industrial processes. Another example is the industry that manufactures different sizes of wire which con stitute the raw material for other factories. A final example is that of the tin container producers who supply a large number of other established industries. Undoubtedly, however, transportation costs in our case will continue to be a highly-important element in the decision of an industrial concern as to whether to locale in Puerto Rico or not. We trust that new methods of technology with respect to transpor tation and loading and unloading operations will be more efficient and economical and thus contribute to facilitating our industrial development. Electric Power: Another essential factor in industrial develop ment is the availability of electric power, particularly in the case of a country such as ours which cannot call on natural resources such as oil, coal and natural gas. The Water Resources Authority of Puerto Rico, which is in charge of the production and distribution of electric power, has carried out a program for the construction of both steam and hy draulic generating facilities and of transmission and distribution lines. Ils efforts have endowed the industrial development program with the electric power facilities needed in connection with the estab lishment and functioning of the newly-promoted manufacturing concerns. Our electric power rates are comparable to those of industrial areas in the United States which depend principally on electric pow er that is steam-generated: for example, the New England and Mid dle Atlantic slates. The average cost per kilowatt-hour for the industrialist fluctuates between 1.500 and 2.500. For many in dustrial concerns of substantial size, this cost is reduced to as low as one cent. Owing to the foresight exercised when planning these electrical facilities, any point in Puerto Rico will serve as a feasible location

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for industrial enterprises whose electric power requirements are those normal to industry in general. Water: The availability of an adequate water supply as an in dustrial localization factor is today of decisive importance. ater requirements of industrial firms established to date in Puerto Rico. with a few exceptions, have been such that they could be met from sources developed earlier by the Water Supply and Sewage System Authority of Puerto Rico, the agency in charge of this function. How ever, present facilities are not capable of satisfying the water sup ply requirements of the type of industry currently being developed and which it is feasible and advisable to promote from the stand point of the industrial development potential of certain regions of the country as well as the improved integration that such industry will bring to our industrialization efforts. In response to this situa tion our government has undertaken a study of all available sources of water, on the surface as well as subterranean, and of the re quirements of our potential industrial development, for the purpose of initiating as soon as possible whatever additional projects will be necessary in order to make a sufficient supply of water avail able to industry, in keeping with our natural hydraulic resources, in every region of Puerto Rico where industrial development is feasible. Industrial Waste Materials: The adequate disposal of industrial wastes is a factor for consideration when establishing an industry. For this reason it is necessary to provide adequate sanitary sewage systems to enable industry to eliminate its wastes, in the interests of satisfactory industrial development. The lack of these systems would make it necessary for industry to construct individual sys tems which in some cases would be prohibitive from a cost stand point. It is true that in the case of noxious wastes industry al ways has to install facilities for treating such materials before they can be discharged into public sanitary sewage systems. However, such installations are generally financially feasible for the industry involved, which would not be the case if after having partially treated waste materials, the company would have to defray the cost of sewer facilities to discharge the wastes in distant bodies of water. The Water Supply and Sewage System Authority of Puerto Rico is carrying out a program of sanitary facility construction in the measure and as speedily as its resources will permit. This, also, will encourage the development of our industrial program. Labor: Together with the over-all supply of labor, the composition and skill of the labor force influence industry localization, depend ing on the specific requirements of the concern involved. Our labor force resource is ample. At almost any point on the island it is possible to recruit the necessary labor for the in dustry with case. About 40% of our labor force is made up of

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persons between the ages of 20 and 35, a circumstance that will continue for a long time since half of our population currently is less than 14 years old. We should point out, however, that in countries such as ours which arc lacking in a long industrial tradition, although labor is abundant, an important resource, it is necessary to intensify the programs aimed al endowing that labor force with the appropriate skills. Our government is attempting to achieve this objective through vocational education programs and training centers, in ad dition to primary and secondary education. Through its Industrial Services Department, the Economic Development Administration lends counsel and aid to industrial enterprises in training workers and supervisory personnel. In addition, the Governor created a Committee on Human Resources, which was assigned the task of conducting the necessary research and investigation on man power and on the needs of our economic development program. The Com mittee’s major purpose is to recommend measures to guide our educational and other programs in such way that our industrial pro gram will be able to count on the required trained labor. Social Facilities: Housing, schools, hospitals and recreation centers are examples of the social facilities which carry heavy weight in the decision as to whether or not to establish an industry in a given location. In our case this has been one of the reasons back of the greater concentration of industries within or nearby the metro politan areas of our most important cities, particularly that of San Juan. In response to this situation, our programs for providing schools, parks, centers of tourist attraction, housing and hospital facilities are giving emphasis to the development of these types of social installations throughout the island, in coordination with other economic development programs. Incentives: The incentives offered to facilitate industrial develop ment also contribute in large measure to localization of industry. Incentives offered by the Puerto Rican government include the following: 1. Worker recruitment, selection and training. 2. Development Bank loans, up to 50% of the installed value of the machinery and equipment. These are usually for a period of five years and carry a reasonably low interest rate. 3. Credits from the Industrial Development Company in in stances in which it is not possible to obtain bank financing and provided that the public interest is served by such assistance from the Company. 4. Localization or other special incentives for firms that service local industry, or are established in towns in the interior of the island, or employ 500 or more workers. Incentive pay-

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merits usually have an upward limit of $25,000, depend ing on the specific case, and may take any of the follow ing forms: a) One year’s rental, free of charge. b) Payment of transportation costs on machinery and equipment, from the United States to Puerto Rico. c) Payment of salaries for instructors who are brought in to train the workers. 5. Construction of standard-type buildings that are leased to industrialists for rents fluctuating between 50c and 85^ per square foot. Special buildings are also constructed for specific industries and are sold to them on the basis of a moderate down-payment with the remainder payable over a reasonably long period and at a low rate of interest. 6. Advisory assistance on engineering and industrial service aspects of the business. 7. Tax exemption. In the majority of cases tax exemption extends to the following municipal and commonwealth fiscal charges: a. Corporate income taxes for a period of 10 years. b. Municipal licenses, for 10 years. c. Personal income taxes on dividends from the industry, during the first 7 years, for residents of Puerto Rico. d. Real and personal property taxes for a period of from 5 to 10 years, depending on the amount of the invest ment. Eligible firms arc those that manufacture products that were not in production on a commercial scale in Puerto Rico as of Jan uary 2, 1947, as well as others included in the list of products enumerated in the Industrial Incentives Act of 1954. Any company that closes down a factory in the United States for purposes of transferring it to Puerto Rico is not eligible. Tax exemption is established in the form of a contract between the firm and the Government of the Commonwealth of Puerto Rico. It is subject to rescission if the firm does not comply with its obliga tions in the matter of minimum employment and continued opera tions beyond a specified date. As soon as the tax exemption period expires, the concern be comes subject to Commonwealth taxes. These incentives promote industry generally and encourage the establishment of new plants in those places in which they are likely to be of the greatest benefit for our economy. They also enable promotion of the type of industry which will best contribute to the satisfactory integration of our industrial development. Let us take a look now at the methodology used by the Indus trial Development Company for industrial localization, employing for the purpose the tools we mentioned earlier.

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REGULATORY PLAN The principal instrument utilized by the Industrial Development Company in determining industrial enterprise localization is the Regulatory Plan covering Physical Facilities for Industry. This is a document which contains the recommendations of the Industrial Development Company with respect to land, build ing, and service facilities that must be provided in order that Puerto Rico’s industrial program can develop in such way as to achieve the goals fixed by our government with the aim of economic growth. When preparing this document, the first step covered an in ventory of facilities of this nature that were already available, a compilation of data on employment and unemployment, available labor, climate, specific requirements of the various types of in dustry, topographical and subsoil characteristics of the various areas open to industrial development, and other information and studies prepared by government agencies connected with the industrial de velopment program. The second stage covered an analysis of the entire inventory mentioned above and the formulation of forecasts on our industrial development and its requirements, in line with the goals and ob jectives set for our economy. The third stage included specific recommendations on prospec tive programs and public works. These recommendations had to do with the elements of priorities, costs, and financing, among others. This regulatory plan was prepared (and is currently being re vised) with the participation of government agencies charged with performing the various aspects of the industrial development pro gram. Chief among these is the Planning Board, which in the final analysis will be the one to adopt the plan. The Board has co operated in the formulation of policies and goals with respect to uniform regional development and the supply of basic economic statistics and other data. As a result of this study it is recommended that the island be divided into integral regions, involving a logical grouping of the seventy-six municipalities that comprise the country. The integral regions have been laid out in such way that they include neighboring municipalities which, by virtue of topography, highway routes, population concentration, economic development, and public services can be considered homogeneous areas. This delineation allows for the rapid and efficient interchange of products and services between the municipalities included within each integral region. It also facilitates a more accurate analysis of the resources available on the island in such way that they can be used most effectively and that industrial localization will be in response to propitious choice that will contribute to our uniform development.

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Industrial employment goals are set for each of these regions for the year 1975. Recommendations are made regarding the indus trial areas necessary in each region, subregion and municipality, based on the foregoing goals as well as the following factors: employment standards by type of industry, the proportion of total jobs attributable to each class of industry in the interests of integral development, and land requirements for the various types of indus trial concerns involved. The study goes on to include recommendations on localization in the different areas, based on characteristics of available land. services that already exist or could feasibly be provided, labor force, land use as proposed in the regulatory plans already adopted by the Planning Board for the development of such regions or urban areas, etc. The document also includes recommendations on buildings, services and facilities that must be provided for industrial de velopment during the period covered by the Plan. In summary, the recommendations contained in the regulatory plan serve as a guide for the following activities related to the provision of facilities required by industry: 1. Industrial Development Company programs related with physical facilities for industry. 2. Highway construction programs. 3. Urban and rural water supply and sanitary sewage system construction. 4. Programs for the construction and improvement of systems for producing, transmitting and distributing electric power. 5. Programs for the construction of port facilities and airports. 6. Housing construction programs. 7. Programs for the construction of recreational facilities and other social service projects. To fulfill special needs, such as industrial ports, the Company also prepares regulatory plans for the development of certain specific areas. These regulatory plans represent a more detailed refinement for a specific region of what the Regulatory Plan covering Physical Facilities for Industry recommends in more general terms. These specific areas generally possess characteristics that facilitate the development of an integrated industrial complex. Such is the case of Guayanilla where an industrial complex has been developed on the basis of the petroleum industry. The installation of a modern refinery adjacent to an excellent port has formed the nucleous of an industrial complex in that region which initially' included. apart from the refinery', another industry utilizing derivatives from

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the oil-refining process and a modern electric power generating installation integrated with the general system throughout the island but which provides the electric power necessary for that developing industrial complex. Other regions in Puerto Rico are also deemed to have the potential for similar industrial complexes: for example, the Port of Jobos and the area west of San Juan Bay. Compliance with the recommendations of the regulatory plans completes the planning process and lends effectiveness to this im portant governmental function. Described below are the tools utilized by the Industrial Dev elopment Company in acting on the recommendations of the Regu latory Plan covering Physical Facilities for Industry.

LAND-PROCUREMENT PROGRAMS One of the essential factors for the development of an indus trial program is the availability of developed lands that possess the characteristics necessary to industry, are in a satisfactory location, and are reasonably priced. The Development Company's industrial land-procurement pro grams seek to fulfill the above purpose. The programs include the procurement of sufficient land to cover estimated demand for thrce-ycar periods, as outlined in the recommendations of the Regulatory Plan covering Physical Facilities for Industry. These lands arc made available by the Company for industrial programs carried out by private interests, as well as for purposes of its own industrial development efforts. These programs involving advance purchase of industrial lands arc necessary and advisable for several reasons: a) They permit an orderly development of the industrial program, b) They obviate the problems inherent in a hasty selection of land for carrying out projects demanded by rapid development. c) They protect private initiative as well as the Company against increased land costs resulting from the construction activities gen erated by our development program itself, with the consequent economy in investment in land, d) The industrialist is given an opportunity of choosing a site best adapted to his needs. I should mention that although the Company ordinarily attempts to acquire such lands by negotiation, in a certain number of cases it is necessary to resort to expropriation. A sound expro priation law is very important in facilitating the rapid procurement of lands, although the process of resolving differences of opinion with respect to price may be more time-consuming. Otherwise, the development of the industrial program would be seriously hindered. The preparation of land-procurement programs involved a careful study of localization factors, such as increase in the popu lation, composition of the labor force, topography, type of industry

localization problems

to be developed, available services, etc. Our experience indicates that the following standards arc satisfactory in our case when estimating the area necessary, once the industrial employment goals have been set for the period covered by the program, in accordance with Regulatory Plan recommendations.

Relationship Between Employment and Area Requirements, By Type oj Industry Type of Industry

Heavy Semi-heavy Light

Average Lot Size (Cuerdas 4-)

Number of Jobs per Cuerda

Average Number of Jobs per Industry

30 4 2

5 20 40

150 80 80

A cuerda = 0.9712 acre.

With respect to the distribution by type of industry, our expe rience indicates that up to the present, 5% of total industrial em ployment forecast, for our program can be assigned to heavy indus try, 25% to semi-heavy, and 70% to light industry. These standards are periodically revised since they must be adjusted to conform to current industrial development trends. Up until the present time we have also found that of the total lands necessary for the industrial program, 33% have gone to private interests, and the remaining 67% to the Industrial Dev elopment Company. The 67% represents total lands acquired by the Company. However, these land areas are available for rental or sale to private initiative also. This state of affairs is subject to periodic review since one of the objectives of our industrial pro gram is to see to it that private activity participates to an increas ing degree in development efforts. To illustrate the evolution of the two land-procurement pro grams sponsored by the Company, we summarize below their status as of June 30, 1958:

Total area acquired ...................... Total area in industrial use, or sold for purposes connected with our programs.............................. Area committed for immediate industrial projects..........................

Cuerdas

Equivalent in acres

2005

1,947.3

1266

1,229.5

71.8

278 PROCEEDINGS ECONOMIC PLANNING SEMINAR INDUSTRIAL URBANIZATION PROGRAMS

The procurement of land in itself is not sufficient to fulfill the objective of making such areas available for immediate use by industry. They must be developed in order to endow them with the facilities necessary to industrial operations. At the same time, they must be duly integrated into the general development of the community. With this aim in mind the Industrial Development Company has instituted three-year Industrial Urbanization Construction Pro grams. These urban developments vary in size in keeping with the demand forecast for such facilities and the corresponding geographic location. They arc designed to create a propitious environment and to make full use of the benefits afforded by the science of urbani zation. In this way industrial activity is subject to an orderly and efficient growth and is integrated with the development of our towns and cities. With respect to social welfare — the cardinal objective of our programs — our industrial urbanization efforts facilitate the provision of services, transportation and social facilities for the worker and protect the rest of the city from the inconveniences attendant on certain factory operations. Lots comprising these industrial urbanization zones are made available for the following purposes: 1. For buildings pending construction under the typical indus trial building construction programs. 2. For specialized industrial buildings. 3. To cover the needs of private initiative for projects connected with our programs. The size of the lots provided in these industrial urban dev elopments, according to the type of industry involved, is sufficient to allow for the construction of normal-sized buildings for the indus trial concerns involved and for their future expansion. Sufficient parking areas arc provided to permit efficient operations of the industry, as are other space facilities called for by the particular needs of the industrial uses to which the lots are devoted. The following are among the standard specifications adhered to in the industrial urbanization projects:

Lot size Right of way

Driveway

Sidewalks Safety zone

Semi-heavy use Light industry use Main streets Side streets Main streets Side streets

4 cuerdas (3.9 acres) 2 cuerdas (1.9 acres) 18 meters (19.7 yards) 10 meters (10.9 yards) 12 meters (13.1 yards) 7.3 meters (8.0 yards) 1.5 meters (1.6 yards) 1.5 meters (1.6 yards)

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These urban developments are equipped with water service, elec tric power, sanitary sewage systems, street lights, and fire hydrants. The Industrial Development Company encourages private inter ests to develop urban areas of this type and has already been successful in this respect in the metropolitan area of San Juan. The table below outlines the results of the two industrial urban ization construction programs developed, or in process of devel opment, by the Company as of June 30, 1958:

Total area developed Total lots laid out Lots in use or sold for purposes connected with our programs Lots committed for immediate projects

772 cuerdas (719.8 acres) 395 271 22

PROGRAM FOR CONSTRUCTION OF TYPICAL BUILDINGS

The experience gained during the course of Puerto Rico’s indus trial program points up a factor that can contribute to the esta blishment of industries and al the same lime channel that program so that all areas of the country will enjoy its benefits: 1 refer to the provision for immediate occupancy of standard buildings having the size and facilities normally required by the type of industry representative of the bulk of the newly-promoted concerns. The Industrial Development Company sponsors programs for the construction of typical buildings to provide — in anticipation of demand — the above mentioned facilities for immediate occupation by the new industries. Program duration has varied between one and three years. Several elements are taken into account when select ing the corresponding sites: demand by industrialists for buildings in given municipalities; the employment and unemployment situation in the areas under consideration; the number of industries esta blished there, in comparison with other industries: the availabilty of industrial zones; and policy with respect to balanced economic development. Building sizes best adapted to the needs of industries estab lished in Puerto Rico have been shown by experience to be either 6,000 square feet, 11,500 square feet, or 23,000 square feet. The structures generally arc made of reinforced concrete blocks. Three different types of roofing are provided: flat tile roofs, single-slope “monitor” roofs, and double-slope monitor roofs. The buildings are attractive in appearance; they are painted in good taste and in handsome colors, and arc equipped with large patios, loading and unloading areas, and parking space. They are designed to be hurricane-and earthquake-proof.

280 PROCEEDINGS ECONOMIC PLANNING SEMINAR Industries may cither rent or buy typical buildings constructed by the Industrial Development Company. For purposes of facilitating the establishment of industries throughout the island, certain rental charges have been established to vary in accordance with the type of town in which the buildings are located. The following table indicates the zones into which the island has been divided and the manner in which rental rates vary: Type oj Building and Rental Rate per Square Foot '/.one

1. San Juan 2. Río Piedras, Carolina, Guaynabo, Bayamon, Catano 3. Toa Baja, Toa Alta, Dorado, Corozal, Vega Alta, Vega Baja, Ma nati, Loiza Rio Gran de, Trujillo Allo, Ca guas, Curado, Junco, San Lorenzo 5. Ponce, Mayagüez, Arecibo, Cayey, Guayama 5. Remaining towns on the island

Flat tile roof

Single-slope monitor roof

Double-slope monitor roof

85^

90<p

95<f:

75Í

80£

85 £

70£

75£

80¿

60¿

65 £

70£

50£

55<

60<

Rental rates on bu ildings less than 11,500 square feet in size are 10^J more per square foot than those indicated in the above table. Under the six programs that the Company has developed or is currently sponsoring, by June 30, 1958 it had constructed 196 typi cal industrial buildings having an area of 2.600,000 square feet, distributed among 63 municipalities. Of this total 144 buildings with a total area of 1,983,000 square feet are in use or have been sold for purposes connected with our programs, and 12 buildings with a total area of 142,000 square feet are committed for immediate projects. These programs, after the fashion of the others carried out by the Company, encourage private interest to provide these facilities and to acquire the Company-constructed buildings currently in use.

Note:

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281

PROGRAM FOR CONSTRUCTION OF SPECIALl'ZED INDUSTRIAL BUILDINGS Apart from providing typical buildings, the Industrial Dev elopment Company has developed a program for the construction of special buildings which are erected at the industrialist's request and designed to serve the specific needs of the industry involved. These buildings reflect the same high structural and architectural standards as the typical buildings, but they are constructed in the size re quired by the particular industry, and arc further equipped with whatever facilities may be called for by the concern in question. In some instances the Company finances building construction wholly or in part. In others it constructs the building and rents it to the industrialist, or undertakes construction on the basis of a combined rental-sale contract. The location best suited to the industry is determined in accordance with the requirements of the specific industry involved and the recommendations of the regula tory plan. Thereafter the choice of one among several appropriate locations is made, taking other economic factors duly into account. As of June 30, 1958, the Company had constructed 124 special industrial buildings with a total area of 3,357,000 square feet and distributed among 45 Puerto Rican municipalities. As the final point for discussion, let us examine the Dev elopment Company’s record in the matter of factory closure.

DATA ON INDUSTRIES DISCONTINUING OPERATIONS

We think it a good idea to analyze our experience in recent years with respect to factories that have discontinued their oper ations in Puerto Rico. This should serve to underscore the impor tance of the analytical study of the localization factors outlined hereinbefore. In the last three years a reasonably small proportion (7%) of established factories have discontinued operations in Puerto Rico. The causes contributing to these factory shutdowns are, among others, the following: 1. Markets — In some cases marketing problems arose from changes in style which reduced the demand for certain products in the garment industry; in others, industries were not able to obtain enough contracts to enable them to operate at an economic level. Another of the causes was the loss of major customers who took their patronage to other manufacturers. Finally, miscellaneous market ing problems applicable to the specific industries contributed to a shutdown of factory operations. 2. Management Problems — In several cases unsatisfactory man agement has constituted an important factor in influencing plant closure. In certain instances this deficiency was found to be the major determinant. Nonetheless, this problem bears no direct rela

282 PROCEEDINGS ECONOMIC PLANNING SEMINAR

tionship with the fact of localization in Puerto Rico since the managers in these cases have been brought in by the industrialist himself. We make mention of this circumstance, however, by way of emphasizing the importance to the success of the enterprise of obtain ing adequate management personnel. 3. Obsolete Equipment — The utilization of obsolete equipment has led to the production of articles no longer in demand on the market and the consequent failure of certain industries. We pointed out earlier that the choice of adequate equipment constitutes one of the essential factors in the establishment of an enterprise. 4. Financial Difficulties — In a substantial number of cases the lack of capital has led to industry failures. Losses are to be expected at the beginning of operations, until such time as the personnel is properly trained, manufacturing becomes efficient, and distribution of the product is duly channelized. Although supervisor and worker training is among the incentives offered to the industrialist by our government, the lack of sufficient capital can lead to failure, as it did indeed in several cases within our experience. 5. Wage Scales — When our industrialization program began, the wage differential between Puerto Rico and the United States was quite large. These wage scales arc subject to periodical review by industrial committees that set and recommend the minimum wage scales which the industry can reasonably be expected to pay. Certain of the industries established — especially those that had to compete with industries in other areas where salaries are much lower than ours — have moved out their plants since they feel that the new wage scales make it impossible to stay in competition with such areas. One of our program objectives is that salaries paid to our workers be at a fair level, in accordance with an analysis of the economic circumstance of the industry, made by the industrial committees. Nevertheless, we recognize that frequent revisions, as was the case up until a short while ago, (when these wage scales underwent annual modification) do not make for the best functioning of industry. Legis lation has fortunately been passed, proriding that the review of ■wage scales in force take place every two years. 6. Social Facilities — The lack of social facilities at the factory site has not been the major cause for factory transfers or closure; however, it does constitute a contributing factor. The lack of schools for English-speaking children, housing facilities for supervisors, rec reational facilities and similar services can make it very difficult for the firm to obtain the services of the best management personnel for the factory, or can build up a feeling of discontent among such personnel. This, together with the other problems we have mentioned, has in some cases led to a transfer of the factory to larger cities and in others to plant shutdowns.

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283

7. Miscellaneous Causes — Other diverse cause which have been reported to have contributed to factory failure in some cases are the industrial operations problems created by the interruption of port facilities. The latter has been attributable to strikes on the docks, frequent changes in personnel which means that new personnel has to be trained, and difficulties with the United Stales labor unions, etc. The foregoing discussion illustrates the importance of a careful analysis of the economic factors having a bearing on the estab lishment of a given industry. Although in general terms and for various types of industries a case can be made for the greater advan tages afforded by operating in Puerto Rico as compared with else where, certain differences may nonetheless exist between industries within the same class as regards raw materials, products, processes and markets. These should be analyzed separately. A wise choice of industrial site depends, then, in large measure on the company itself, which presumably knows best with respect to its own re quirements and can make an accurate appraisal of the various fac tors involved. CONCLUSION Io create conditions that will foster adequate localization of industries, joint and coordinated action is called for on the part of the agencies handling the development of industrial operations facilities. These include, among others: highways, water supply, electric power, ports, airports, communications, housing facilities, hospitals, etc. Adequate planning of physical facilities for industry is also required, taking into account the economic and other factors neces sary to the success of every industrial concern. Finally, programs must be adopted to insure effective action in response to recom mendations and to facilitate the development of the industrial pro gram by both private and public interests. I he foregoing is based on the experience accumulated by the Economic Development Administration and the Industrial Develop ment Company of Puerto Rico. We continue to bend every ef fort toward developing new methods and new ideas aimed at im proving our industrial climate. In this way desirable standards of living can be achieved in compliance with the ultimate objective of our economic development program: social and economic bet terment for our people.

ECONOMIC PLANNING SEMINAR

October 27 — November 28. 1958

PUBLIC SERVICE INDUSTRIES

By Sol Luis Descartes

executive Director, Vater Resources Authority

Víctor M. Cataldo Chief, Electric Power Utilization Division

Lecture prepared for the Economic Planning Seminal * held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

PUBLIC SERVICE INDUSTRIES By Sol Luis Descartes

Executive Director, Water Resources Authority 1.

Victor AL Cataldo Chief. Electric Power Utilization Division

Background

Tiie Water Resources Authority is an autonomous public en tity (known in Puerto Rico as a public corporation) in charge of the production, distribution and sale of electric power on the is land. By delegation of the Federal Government, it also undertakes to administer three irrigation systems. The administration, pro perties and expenditures connected with those systems, however, are kept completely separate from the electrical enterprise. The Author ity is under the jurisdiction of a Board of Governors composed of the Governor of Puerto Rico and the Secretaries of Public Vi orks and Agriculture. The organization is broken down into nine ad ministrative subdivisions under the supervision of an Executive Director. The government began to produce and sell electric power in the year 1915. when it began to operate a small hydroelectric station in the Southern Coastal Irrigation System. That station had been constructed for purposes of taking advantage of a waterfall from an irrigation dam. The Irrigation System offered surplus production to private pow er companies for distribution and sale, but the offer was turned down. Thereupon the System began to sell electricity at low prices, and soon a heavy demand built up which made it necessary to expand electrical installations. Other generating centers were constructed which also made use of waterfalls from irrigation dams. By the year 1924 the public clamor for a more extensive elec tricity service reaffirmed the urgency of government attention to that requirement. For this purpose the Water Resources Utilization Department was created as a public agency under the jurisdiction of the then Department of the Interior (today called Department of Public Works) to look to the provision of electricity, independent of irrigation services. In accordance with appropriate legislation, this organization utilized various water resources for developing a hydroelectric system that underwent rapid expansion to provide service for small villages on the southern coast and for extensive rural areas. The law provided for the imposition of a lax, with

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PROCEEDINGS ECONOMIC PLANNING SEMINAR

the proceeds to be devoted to the construction of dams, reservoirs, and hydroelectric generating plants. The system was also expanded by projects financed by the Federal Government as a part of the programs undertaken during the depression in an endeavor to offset the effects of unemployment. The power system located in the City of Ponce was purchased in 1937 from a private company. As an emergency war measure aimed at economizing fuel oil, the United Slates government during World War II attached the two private companies in the electric power business in Puerto Rico and placed them under the administration of the Water Resources Utilization Department as a part of an integrated operating system. By agreement with the owners and with court approval, in 1944 the Water Resources Utilization Department bought the properties of the Porto Rico Railway Light & Power Company and the Maya güez Light & Power Company.

Water Resources Authority

Act No. 83 of May 2, 1941, created the Water Resources Authority as a public corporation and transferred to it the proper ties formerly administered by the Water Resources Utilization De partment. The Authority was assigned the task of supplying elec tricity for all of Puerto Rico. The purpose of the change in legis lative structure was to provide operating autonomy to permit the agency to obtain resources through interest-bearing bond issues. The Board of Governors of the Authority fixes the rates charge able on the sale of electric power at the suggestion of the Executive Director and after holding public hearings. The law calls for pro vision of electricity at the lowest cost possible, but the price for electric power must be high enough to cover service costs, the cost of financing expansion, and other contractual obligations of the Authority. The law provides that the Authority establish standards with regard to the selection, recruitment and employment of personnel and authorizes that agency to negotiate its own purchases directly, in keeping with certain stipulations. In short, although it is a public body, the Authority is exempt from the regulations which govern ordinary government agencies in the matter of personnel selection, purchases, rules covering ad vance audits of accounts, and others, in order to give it the neces sary flexibility to permit it to operate like a business enterprise in the essential aspects of efficient performance. The Comptroller of Puerto Rico periodically audits the records of the Authority a posteriori but is not empowered to halt any ad ministrative action. In keeping with the terms of the Constitution and of the above mentioned law, the Comptroller must limit his action to pointing out the deficiencies, if any, brought to light

PUBLIC SERVICE INDUSTRIES

2.39

through a post audit of all the public departments or agencies sub ject to his investigation. The Authority at Present The Authority currently administers 18 hydroelectric plants and 4 thermoelectric plants having a total reliable capacity of 365,000 kw., including the cold reserve, of which almost 268,000 kw. are produced by thermoelectric units. The generating plants form a part of a vast transmission system composed of 1,200 miles of power lines that stretch over the entire island. This electricity network or transmission system incorporates all of the country’s generating capacity and makes it available at service points through the use of distribution substations that are connected to the net work. The distribution system is made up of the aforementioned substations in combination with approximately 5,000 miles of power lines. After deduction of depreciation reserves, the net value of the Authority’s real property amounted to 3193,526,000 as of June 30. 1958. The total value of interest-bearing bonds in circulation as of that date reached the figure of 8160,544.000. In round numbers, in fiscal 1958 1.6 billion kilowatt-hours were generated in Puerto Rico, and saljK amounted to 1.3 billion, or an increase of 20.4% in comparison with the previous year. At present service is provided for approximately 300,000 users, with some 20.000 new consumers being added yearly. Last year $34,681,000 were received in income from the sale of electric power. This figure, when added to certain other income items, brings the total revenues to 835,341.000. The Authority provides jobs for some 3,500 persons on the operating and main tenance staffs. The rate of growth with respect to electric power consumption in Puerto Rico is one of the highest in the world, and at the present rate that consumption will have been doubled four years from now. Whereas Puerto Rico increased its use of electricity by an annual average of 18% during the past three fiscal years, consump tion in the United States rose by only 5.1%. Other comparative figures: Cuba, 19%, Argentina, 3%; Chile, 16%; and Mexico 8%. Per capita consumption in Puerto Rico currently amounts to 480 kilowatt-hours, compared to 3.340 kilowatt-hours in the I nited States. Cuba’s per capital annual consumption amounts to 200 kilowatt-hours; Argentina, 280 kilowatt-hours; Chile, 310 kilowattthours; Panama. 110 kilowatt-hours: Venezuela. 250 kilowatt-hours: Uruguay, 440 kilowatt-hours; Spain. 400 kilowatt-hours: Italy. 700 kilowatt-hours. (Estimates based on monthly statistical reports pub lished by United Nations.)

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Plans and Programs for Physical Expansion As a result of the very nature of the service provided and the technical details involved in constructing and operating power installations, it is quite difficult to plan the physical expansion of the electricity network. Electricity is the only commodity that cannot be stored. Therefore, it is necessary to produce electricity at the moment it is requested Dy the consumer, in the amounts required, and for delivery wherever the user stipulates. To satisfy this need it is necessary to provide sufficient gen erating capacity to keep the requisite units always in operation in order to supply demand. Transmission and distribution installa tions must also be furnished so that the power can he made avail able where it is needed and at the voltage adequate to the user’s requirements. Because it is an island. Puerto Rico has no opportunity of interconnecting with neighboring electric power systems for pur poses of mutual assistance in emergency cases. In addition Io the generating capacity required to meet demand, it is necessary to make provision for reserve capacity which is proportionately higher than in the case of systems that enjoy the benefits of interconnec tion in continental areas. To insure continued service, generating capacity equal to that of the largest unit in the system is always in operation in addition to the electric power production needed to meet current demand. This operating reserve makes it possible to continue to meet power needs even when any of the generating units has to shut down because of damage of some sort. Moreover, it is necessary to have reserves that will enable preventive maintenance and emergency repairs of the units in service. At least two and a half years are required for the installation of additional generating capacity, and no less than 18 months for providing substations and other electrical equipment. This means that generating needs must be estimated at least three years in advance. Conservative estimates may lead to power rationing for current users and the refusal to give service to the huge new in dustries. Contrariwise, if the demand estimate is too optimistic, capital expenditures may be excessive and operating costs may in crease appreciably' before income increases in sufficient proportion to permit operations on a reasonably economic basis. It is gratifying to be able to report that Water Resources has always supplied all electric power consumption needs in Puerto Rico without rationing the service or hampering the establishment of new industries. However, on two occasions following World War II in 1945 we have faced power crisis which fortunately were re solved with no adverse effects on the community. 4.

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In the year 1916 the rate oí growth in consumption require ments (immediately after the war) exceeded original plan esti mates, and we were obliged to purchase a floating generating plant, the Seapower, from the United States Navy. This vessel had a gen erating capacity of 30,000 kilowatts and operated at anchor in San Juan Bay for four years. After that time, it was sold to a company in Brazil, where it is still in service. In 1955 we went through a critical period before the 44.000kilowatt unit in the San Juan plant could be put in operation. The imminent shortage was aggravated by a severe drought. For a second time the crisis ivas met by renting another floating power plant from the United Slates Navy which remained in service from July, 1955 to April, 1956. Planning Committee The job of coordinating physical expansion planning for the Authority’s electric power system falls to the Planning Committee headed by the Chief of the Division of Electric Power Utilization. Membership comprises the Chief Engineer in charge of construc tion projects, the Chief of the Electric Power Division, the Comp troller, and the Chief of Electric Power Utilization (as already mentioned). The Committee reviews, coordinates and integrates the various aspects of planning performed by the corresponding divisions, and ultimately formulates an over-all plan for the Au thority. Committee recommendations are presented to the Executive Director for his consideration, approval, or final modification, be fore being submitted to the Board of Governors and the Planning Board. Planning covering the expansion of the electric power system begins with a forecast of the consumption of electric power. This is prepared each year and generally is extended to cover a period of six years. The basis for the forecast is an extrapolation of the trends observed in previous years. Thanks to strict coordination with other government agencies, data arc available for use in test ing the experience-based extrapolation. For example, data on hous ing starts are gathered from the Building Permit Board, from the National Housing Administration, and from state and municipal agencies in charge of low-cost housing construction. This informa tion is used in determining estimated domestic-type consumption. Useful guidance is also provided by an analysis of the con sumption by user per consumer-block and by surveying firms sel ling electrical appliances for the home. Semi-annual reports of the Planning Board on the general state of the economy, and Department of Agriculture and Commerce forecasts are used in verifying the projections estimated on the basis of experience and revised in the light of more specific informa tion obtained from other sources.

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In like fashion commercial use trends are studied, taking into account construction data on hotels, hospitals, office buildings, super markets, shops, etc., provided by the Planning Board and the Industrial Development Administration. Puerto Rico’s accelerated industrialization requires close co operation and collaboration with the Economic Development Ad ministration and the Industrial Development Company, who report on the results of industrial promotion and furnish information on their own forecasts covering new factories that will be installed in Puerto Rico. During the past five years this has been the most delicate planning phase since one heavy industry alone can rep resent consumption amounting to as much as 5% of total generat ing requirements. Consumption and income forecasts based on the studies de scribed above are submitted for discussion by the Planning Com mittee, where they are either accepted or modified. The Electric Power Division converts the estimates of power sales into annual and monthly production requirements, thus pro viding the basis for estimating maximum demand that must be met monthly during the six-year period under study. Thereupon the preventive maintenance program for groups of generating plants is reviewed, since it is necessary to shut down each of the generat ing units annually for inspection and repairs. Monthly require ments for additional generating capacity are determined for the 72 months involved: Operating reserve capacity and generating capac ity scheduled for repair each month are added to the maximum monthly demand for power. In keeping with the foregoing bases the Electric Power Di vision presents to the Planning Committee various alternatives for producing that demand by using different sizes of generating plants. Economic studies arc conducted to determine optimum capacity: i.e., size in terms of kilowatts to be produced by future units. The larger units are generally more efficient and cost less per kilowatt of installed capacity. Operating costs also decline since practically the same crew of operators who take care of a small unit can likewise handle the functioning of a larger one. These advantages are offset by the fact that the larger unit requires more operating reserves and more cold reserves. The installation of larger units also makes it necessary to schedule installation in advance and operate for some months at a capacity in excess of that required. For example, if the annual growth in consumption amounts to 50,000 kilowatts and units of approximately that size are used, it is fairly easy to make supply correspond to demand. However if in response to that growth 100.000-kilowall units are purchased, for example — that is, twice the increase in annual demand — the alternatives are: spend a year without providing the necessary power production with the

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consequent risks; or, spend a year with a 50.000-kilowatt surplus which will be gradually reduced as the year goes by. Obviously, such a decision requires the most careful study. The next step in formulating plans for the provision of gen erating capacity consists in determining the most economic and convenient location for the new units. The Authority has a com puter for analyzing electrical networks covering all the components of our electricity system. By means of this machine the function ing of the Authority’s system is studied to test the result of instal ling the new unit in any of various places. This procedure also serves to determine what other components will have to be added to the system, such as transmission lines and substations. The study also indicates what improvements and additions will be necessary for good performance and efficiency in the transmis sion and distribution of power. By this means, in addition, it is possible to analyze the quality of the service that can be anticipated as a result of locating the new units in each of the alternative sites under study. A thorough economic study evaluates all these factors that are jointly taken into account when making the final decision regarding choice of the installation site. The Chief Engineer studies the proposed sites, evaluates the cost of the land, prepares sketches showing plant location at each of the places under consideration, analyzes the subsoil, and pro vides construction cost estimates covering the new plant installa tion al each of the several sites under study. After a decision is reached regarding the date on which the new generating plant is to begin operations, the capacity of the unit, the installation site, and the estimated cost of the plant and auxiliary components of the system, the six-year capital improve ment program is prepared, which in turn governs the budget of capital expenditures. A complete report outlining the entire construction program of the Authority is submitted to the Planning Board. I p to now plans submitted to the Board have only covered the localization of whatever unit is scheduled for installation during the first three of the six years. By way of additional information the Division Chiefs then prepare the operating budget, and the Comptroller coordinates these data and makes up the annual operating balance sheet. He further determines the need for funds to meet the financial re quirements of the program each year, indicating how much money can be supplied out of our own resources and how much should be sought by placing bonds for sale on the money market. Operating budget estimates and financing requirements for the six years are submitted jointly with the construction program to the Board of Governors and thence to the Planning Board.

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The Authority’s Planning Committee started operations three years ago as a means of improving the quality of the planning endveavor through better coordination between the divisions respon sible for planning the various aspects of the over-all construction program of the Authority. Previously coordination had been han dled by the Executive Director without benefit of prior review by all the executives concerned in the different segments of the plan. At the same time these executives had no opportunity to become ac quainted with the over-all picture of Authority performance and the economic implications of the program. Under the new system responsibility for planning in each ad ministrative sector continues to rest with the person designated for that function; however, there is the added benefit of coordination and analysis of the plans from the integral point of view of the institution without incurring in excessive centralization or weaken ing the operating and advisory divisions in this respect. The final report, as well as a record of conclusions regarding each aspect of the plan, are submitted to the Executive Director for approval or modification before passing on to the Board of Governors and thereafter to the Planning Board. To give an idea of the magnitude of the planning activity constantly carried out by the Authority it would he well to give a brief summary of the construction program followed in recent years and in project for the next few years. The construction pro gram scheduled for the next six years calls for an investment of $172,000,000. Capital expenditures for fiscal 1957 amounted to $25,300,000. In 1958 that figure rose to .$28,500,000, and the plan for the current fiscal year will require $10,000.000. In physical project terms, the construction of the second gen erating unit at the plant on the southern coast is being completed. It has a capacity of 50.000 kilowatts and should be in service by the beginning of 1959. Construction is also going forward on a plant having two 20,000-kilowatt turbo-generators equipped with gas turbines at the Mayagüez Thermoelectric Plant. The first will go into operation in February of 1959 and the second, in June of that year. Construction has already begun on the new Palo Seco plant located on the western shore of San Juan Bay, where two units will be installed having a reliable capacity of approximately 90.000 kilowatts. The first should be in service by the beginning of 1960. and the second, by the end of that year. A third 90.000-kilowatt generating uni£ has been purchased and is scheduled to go into service in 1961. A choice of site for this unit is still under study. In short, we have at present 365,000 kilo watts of generating capacity and plan to install another 360.000 by 1961.

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The transmission system up until a few years ago had a capac ity of 38.000 volts. It is expanding rapidly to 115,000 volts that will permit better integration and efficiency, and the old 38,000voll system is being relegated to sub-transmission. A short while ago a 115,000-volt line was constructed from Monacillos to Rio Blanco. Other recent construction included two parallel lines from the southern plant to the City of Ponce and from Dos Bocas to Mayagüez, a single line from Dos Bocas to Mayagüez and another between the southern coastal plant and Guanica. This year new 115 kilovolt lines will begin to be set up from the southern plant to Dos Bocas, from San Sebastián to Aguadilla, from Bayamon to Vega Baja and from Rio Blanco to Fajardo and Mayagüez to Aguadilla. During the past two fiscal years the construction of eight transmission substations has been completed, and 47 substations for distribution have been installed, representing an installed capacity of 443,700 Kv-a., or 55% of the total number of Kv-a., at the be ginning of the period. The next six year’s schedule includes the construction of 10 transmission substations having a capacity of 900,000 Kv-a. In order to administer and maintain this accelerated expan sion of the electricity system it is obviously necessary also to extend the scope of planning to all phases of the Authority’s activities. A system that doubles itself every five years — and now it seems to be four years instead — must undertake an intensive per sonnel recruitment and training program and give constant at tention to administrative organization. Work is constantly being done to review programs, methods and procedure, looking toward simplifying them and putting them in line with modern, efficient operating practices. The organizational structure is adjusting itself to the growth of the physical system. A reorganization plan drawn up with the counsel of Mr. Harry L. Case, management consultant and former Assistant Administrator General of the Tennessee Valley Authority. has been submitted to the Board of Governors. The firm of Rogers, Slade and Hill studies and evaluates all supervisory personnel with a view to setting up an adequate train ing program. Feliciano, Clapp and Sturcke are studying the reorganization of the Pe rsonncl Division, the formulation of the operations budget. and new measures for a better and more economical control of that budget. Mr. Wessenauer. Operations Chief for the Tennessee Valley Authority, together with a group of technicians from that agency, is conducting organization and program studies for the Operations Division. He has begun his analysis with the organization of freight dispatch.

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The installation of heavy industries that require continual and unusual service, plus the growing number of industries being set up all over the island, has forced us to change certain construction and operating standards. The 115-Kv-a., transmission lines formerly constructed involved a passage permit on private land holdings, or a right of way of 50 feet. Hereafter they will have a right of way of no less than 100 feet in width. The 38-kilowatt trunk lines will no longer be constructed along highway routes, thus avoiding the possibility of damage because of auto collisions with the light poles. The growing number of trees planted along the highways is another reason for discontinuing trdnk line construction by the roadside. The new standards will apply to all the 115- and 38-kilovolt lines reconstructed in future. Electrostatic wire protection against lightning will be provided in the case of all 38- and 115-kilovolt lines constructed hereafter. Existing lines will be brought up to those tensions, and the protection against lightning will be installed initially along the lines near key installations. In coordination with the Department of Public Works regula tions governing the trimming of trees planted within the right-ofway areas corresponding to transmission lines strung along the highways are being revised, and the trimming program will be in tensified. To cut down service interruptions, transmission substations are being installed to break up the long transmission lines into relative ly short sections. Rural Electrification Program

The law provides for physical planning and project selection: i.e., the choice of the rural area, village, or territorial zone that is to be furnished electricity. So many requests have been received from the inhabitants of these outlying districts that the Author ity has had to follow the practice of giving them consideration in the order that they come in from private individuals, rural leaders, Congressmen, or mayors. Applications for power service submitted by each block of in habitants or each area that more or less naturally constitutes an individual unit are given the designation “projects”. The Author ity studies the physical environment as well as the number of fam ilies to be served in each case and determines installation costs. When completed, these project analyses are sent to the Planning Board. Each year the Planning Board selects out of the total of proj ects studied (of which there is a current backlog of 580) a suf ficient number to give service to 24,000 users at a total estimated

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cost of $8,000,000. Out of this second group of projects yet an other selection is made, representing the actual construction sched ule each year, which carries a cost limitation of 32,500,000. (This is the amount earmarked yearly for these projects, after allowance for appropriate reserves.) The Board tries to see to it that the program look to the needs of all, or almost all, municipalities. It has a preference for the projects that are the most economical per user; however, it does take into consideration extenuating circumstances that might justify a given project that does not fall into the foregoing classification. A great deal of attention is given to the representations of inhabit ants of the regions not yet served, and of their leaders. We do not have a regulatory plan covering the expansion of rural projects. Both the Authority and the Board recognize the advisability of such a plan to enable better project selection. The need for the regulatory plan is particularly urgent because of the tendency of the population to migrate from one rural zone to an other or to urban areas. The Authority has taken a census of fam ilies who do not yet enjoy electricity services, and the projects needed to render such services are gradually coming up for study. We have requested authorization from the Planning Board to set up a small, well-qualified group to undertake program review, estab lish more specific selection criteria, and formulate a regulatory plan to govern the expansion of rural electric lines. CONCLUSIONS-. Our conclusions regarding electrical industry planning are briefly as follows: 1) The very nature of the industry makes planning essential because of the lime it takes between making a decision to construct an installation and putting it into operation. In Puerto Rico two to three years are required after the corresponding construction decision is made in order to initiate operations of thermoelectric plants. The time re quirement in the case of high-tension wires and important substations and tranforméis is from 18 to 2-1 months. This fact stimulates and accelerates effective planning. 2) Generally speaking, planning for the provision of generat ing capacity may he considered to have been satisfactory. 3) With regard to improvements in the transmission and distribution system we are probably somewhat behind schedule in providing installations in certain regions. 4) Planning and construction of physical installations are better understood, and more easily provided for, than the

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planning of administrative reorganization, procedural changes, and the recruitment and training of human re sources. We deem it essential to include the latter as pects for consideration as an integral part of electrical industry planning, on a par with physical expansion proj ects. 5) In the absence of regulatory plans, and in view of the widespread demand for rural electricity, we have proceeded to select rural projects on a strictly empirical basis. In localities where there is a heavy demand for such services, this practice is probably quite satisfactory foi’ the first years of the program. Once a substantial part of demand is satisfied, and where there are heavy population move ments, it will he imperative to formulate regulatory plans covering rural electricity. In Puerto Rico we have already reached that stage. 6) From an administrative point of view we believe that the planning function should derive from, and form an in tegral part of, operational responsibility. To accomplish the task of formulating the agency’s over-all program we feel that the most appropriate procedure is to assign it to the Committee made up of the executives charged with developing the various aspects of the plan. 7) From an economic point of view the basic explanation of why the electrical development plan has been carried out — and why we have been able to meet the demand for electric power — lies in the ability to issue low interestbearing bonds. Effective and economical financing pro grams also call for adequate planning.

ECONOMIC PLANNING SEMINAR October 27 —■ November 28, 1958

THE WATER SUPPLY AND SEWAGE SYSTEM AUTHORITY By Rafael V. Urrutia

Executive Director

Lecture prepared for the Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth pf Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

THE WATER SUPPLY AND SEWAGE SYSTEM

AUTHORITY By Rafael V. Urrutia

Executive Director Before proceeding to the discussion of my basic theme, and in the interests of a better understanding of our problems and efforts in providing adequate water supply and sewage system services. I should like to remind you of certain fundamental prin ciples which I believe we should all bear in mind. I refer to the following: 1) That to date man has not been able to create water eco nomically by transforming other forms of energy. 2) That water is a raw material that does not admit of sub stitution. 3) That water exists only in those places and in the amounts decreed by Nature. 4) That Puerto Rico’s natural sources do not and will not supply any more water than was already here when the Great Admiral landed or. November 19. 1493. Having set forth the above axiomatic principles, let us proceed now to the topic of the water supply and sewage systems, begin ning with an explanation of the reasons that prompted our govern ment to create the Water Supply and Sewage System Authority of Puerto Rico.

/. INTRODUCTION

Reasons for integration

In his message to the legislature of Puerto Rico on October 28, 1941, Governor Rexford Guy Tugwell had several reasons for recommending that water supply and sanitary sewage system ser vices be centralized under a single government agency. Of the 75 Puerto Rican towns or cities, only six had water service for 24 hours a day. In others, service was provided dur ing 12. 8, 6 and only 4 hours. 18% of the water reached the users without having undergone treatment of any kind. The grave dan ger implied by these untreated waters for hundreds of thousands of the population can be easily recognized, taking into account the

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fact that our surface water is highly contaminated since Puerto Rico has a population density of 260 inhabitants per square kilometer (650 inhabitants per square mile). Even in our larger cities, such as San Juan, Ponce and Mayagüez, that had constructed filtration plants, service left much to be desired because the scant eco nomic resources available did not permit the municipalities to expand their waler conduits at the rapid rale required by urban population growth. Service rates, made up for the most part without any reference to solid economic bases, were insufficient to cover operation and maintenance costs of the water supply system, and to carry out much-needed structural renovation and replacement. Add to this the lack of technical supervision, the frequent turnover in manage ment and other personnel as a result of the chance circumstances of party politics, user bad habits with respect to payment for the services, and the enormous waste resulting from the lack of water meters, and you will have an idea of the disorganized slate of so vital a service as potable water supply. Brief background data on the urban water systems in Puerto Rico, corresponding to 77 municipalities (including Vieques and Culebra Islands) reveal the following: Systems constructed prior to the year 1900 ------------------ 2 „ ,, between 1900 and 1910------------------ 5 „ ,, between 1910 and 1920 ------------------ 26 „ „ between 1920 and 1930 ------------------ 38 „ „ between 1930 and 1911------------------ 6 This table indicates that by the year 19-15 the great majority of existing supply systems had already given as much service as could be expected of them — that is, an estimated twenty to thirty years. Therefore, the structures and installations existing on that date were already incapable of providing the services needed then, taking into account the urban, commercial and industrial growth that was already beginning to make itself felt. There was therefore an urgent need to draw up a plan for capital or basic projects, including permanent and emergency ex pansion and improvement on all existing systems, with very few exceptions. The most critical case was that of the capital of Puerto Rico: Due to the rapid growth of the urban population (from 236,000 in 1910 to 320,000 in 1945, including the urban nuclei of San Juan, Río Piedras, Bayamón, Catano and Guaynabo) the water supply system had become inadequate, and it was necessary to ration water service during several hours of the day and night. The situation existing in the capital was typical at that time of the critical circumstances prevailing in the great majority of water supply systems throughout the island. The problem was the

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most serious, of course, in the larger cities where the demand for water was becoming ever more pressing. fhis situation obliged the Authority to undertake a vast proj ect for developing a new source of supply for the capital. In June, 1950, the Authority completed a new filter installation (known as the Loiza plant) to serve the metropolitan area of San Juan. With an original capacity of 30 MGD, subject to expansion in succes sive stages to 60 MGD and 75 MGD, that plant is fed from the storage dam (completed by the Authority in July, 1954, and located on the Rio Grande de Loiza) by means of a ¡jumping station pow ered by electricity generated in a plant alongside the dam site. A reinforced concrete main inflow conduit measuring 18" in diam eter completes the installation. This Rio Grande de Loiza de velopment, the most important water supply project undertaken to dale by the Water Supply Authority and at a cost of S12.000.000. in company with the Bayamon and Guaynabo river projects, has solved the problem of future demand for water in metropolitan San Juan. This area takes in the twelve towns or urban nuclei of San Juan. Río Piedras, Bayamón, Cataño, Guaynabo, Toa Alta. Dorado, Trujillo Alto, Carolina, Loiza, and Rio Grande, having a combined population (including the adjacent rural zone) of 500.000 inhabitants, which is expected to go beyond the 1,000,000-mark by the year 1980. The situation with respect to the sewage system was even worse. Of the 77 municipalities (including Vieques and Culebra) of which the island was composed, only 42 had sanitary sewage systems. Of these systems, 7 had no sewage treatment facilities since waste materials were discharged directly into the sea. Of the 35 remaining, 22 had septic tanks that were for the most part fifteen or twenty years old. Of these, in turn, 7 also had sand beds for drying out the sludge or mire. Of the 22 septic tanks, only 7 were in good working order, since the 15 remaining ones were completely filled with sludge and most were abandoned and useless. Likewise, most of the 7 sand beds were covered with dirt — a sure sign of the complete abandonment in which these municipal public works had been left at that time. Thirteen towns had sewage disposal plants consisting of Imhoff tanks, all of which were constructed around the year 1921. Eight of these had sludge beds. Of the 13, 5 were completely filled with sludge, 2 already were insufficient in capacity, and only 6 were in good working order. With the exception of the sewerage constructed between 1935 and 1941, such as that of Ponce, Mayagüez, Guaymas, San Ger mán and Orocovis, which was in normal operation, the general picture of the remaining systems could not have been more appal ling in terms of threat to public health: Most of the existing sewage conduits discharged their inadequately treated sanitary affluents into

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water courses supplying a large part of the rural population and even certain towns on the island. The total cost of the 42 sewage systems had amounted to ap proximately 83,500.000 and the circumstances or state of the proj ects financed hy this investment could scarcely have been more deplorable. To complete the picture, our capital and major city had no sanitary sewerage, except for the combined system serving San Juan proper, and facilities for the urban nucleous of Santurce. Such was the situation of the sewerage installed at that time in only 42 of the 77 municipalities. B.

Creation of the Waler Supply and Sewage System Authority

Although the Legislature immediately passed a law in keeping with Governor Tugwell’s suggestions, it was not until the end of 1944 that the idea of integrated services could be put into practice. The reason was that the government of the capital city had ques tioned the constitutionality of the law, alleging it could not be deprived of its property without due compensation. Eventually our highest court decided that the transfer was legal despite the fact that no compensation was involved. Since tbe municipalities as well as commonwealth agencies are “creatures of the state,” in accordance with the Supreme Court decision, lhe transfer merely implied a change in administration and did not call for monetary compensation of any kind. In this way the Water Supply and Sewage System Authority was born.

Integration. Benefits

One of the first steps taken by the Authority was to set up a uniform rate system for the entire island in substitution of the 76 individual municipal rate scales. Shortly thereafter water meters were installed for the great majority of users, and a tre mendous reduction in the waste of Water was brought about. There were cases of certain towns in which water service had been avail able only six hours a day: soon after the meters were installed it was possible to offer the service for 24 hours. Such was the extent of the former waste! Centralization permitted a better use of sources of supply. Thus, for example, the water system of the capital today serves 10 neighboring towns as well as San Juan itself. Water supply facilities in Aguadilla provide water also for three other villages, and those in San Germán. Isabela, Caguas, Juan Diaz, Guayama, Huamacao, Fajardo and Camuy serve two towns each. The new rate schedule, improved administration as a result of the recruitment of highly-qualified technicians and management personnel, the reduction in expenditures as a result of centralization. and other analogous factors converted the water supply and sew’erage

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services in the brief period of three years from a heavily losing venture into a solvent enterprise with an assured economic future. Proof of this statement was had in mid-1949 when the Water Sup ply and Sewage System Authority had no difficulty in placing an interest-bearing bond issue to the amount of S22.700.000 in the New York securities market. It is well to point out here that these bonds do not represent an encumbrance on our property, nor do they infringe on the borrowing capacity of the Commonwealth Treasury. Purchasers know that the only guarantee that they have is our ability to pay. Two examples alone are sufficient to illustrate just what service centralization means for all the municipalities — in particular, the smaller ones having more modest resources. The tiniest of our towns, Las Marias, having a population of a scant 500 inhabitants. had managed to invest only $23,000 in its water supply system. During its first ten years of operation the Authority invested $193,000 there, and Las Marias today boasts a filtration plant that supplies waler as pure as that available in San Juan itself. Our historic mountain town, Barranquitas, had been able to spend only $13,450 for its water system; and a few years later the Authority invested $215,000 to equip it with a modern filtration plant.

Organization

The powers of the Authority are vested in a Board of Governors comprising the Governor of the Commonwealth of Puer to Rico and the Secretaries of Public Works, Finance, Health, and Labor. The Board appoints an Executive Director, a Comptroller, a Secretary and a Treasurer. Remaining officials and staff person nel arc designated by the Executive Director. The Authority s 1.500 employees arc protected by civil service laws and regulations, in accordance with an agreement subscribed to by our Board of Governors and the Personnel Director of Puerto Rico. For administrative purposes the Authority is organized as follows: The Executive Division is formed by the Executive Director, the Assistant Executive Director, and the Executive Assistant. The Chief Engineer supervises the Divisions of Urban Projects, Rural Projects, and Construction. The office of the Chief Planner as well as the Technical, Administrative and Inspection Sections, also fall within the Chief Engineers jurisdiction. The General Services Division handles purchases, transporta tion, warehousing, and care and maintenance of buildings. The Operations Division — the backbone of the Authority — is responsible for supplying water and sewerage services and maintaining the installations in good condition. Its functions also include consumer relations: that is, contracts, meter reading, invoice

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collection, investigation of complaints, etc. For working purposes the island is divided into six operations districts, and these, in turn, into 18 agency subdivisions through which service reaches Puerto Rico’s 75 towns and cities. The functions of the remaining Divisions — Legal, Systems and Procedures, Treasury, Finance and Personnel — are those that the respective names imply. II. AUTHORITY PROGRAMS

Urban Water Supply Systems

The task of expanding existing urban water systems and constructing new ones in order to take care of the constant growth in Puerto Rico’s population, commerce, and industry is an uphill job. For example, at the time we expanded the Guaynabo plant and constructed another at Loiza, we expected to have a filtra tion capacity that would carry us into 1970. However, due to the unexpected rise in urban development construction and the installa tion of new industries, water consumption in the metropolitan area in 1958 is already higher than what we had estimated for 1965. We are therefore currently taking steps to solve the problem of further expansion of the Guaynabo plant and doubling the capacity of the one at Loiza. It is for this reason that the Authority is always on the lookout for new supply sources from rivers and brooks. With this aim in mind, a cooperative agreement was entered into about a year ago by the United States Geological Survey Commission and the Com monwealth of Puerto Rico, providing for a vast hydrological survey of the waters which can be tapped as a source of supply for the island. The initial stage of that study is currently under way. When the Authority was created in 1945, there were only 11 filtration plants in the country, providing water service for 14 towns and having a nominal capacity of 37.72 MGD. Of the remaining 62 towns, 19 were supplied exclusively from deep wells, leaving 43 that despite using surface waters for their supply had no filtra tion plants. The latter circumstance constituted a serious problem. particularly during periods of heavy rainfall. In order to hold the construction of filtration plants to a minimum, we resorted to integration of various villages within a single water conduit system, as outlined earlier. For those villages which by reason of location and topography could not be served by some already-existing plant, a program was instituted for the construction of uniform-type plants. Extremely simple in design, these plants varied only in point of capacity. These installations have been constructed in seven different sizes: 250,000, 350.000. 500.000. 700,000, 1.000,000, 1.600,000 and 5,000,000 gallons per day.

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Between 1950 and June, 1958. we have constructed and enlarged 30 filtration plants having a total combined capacity of 89.84 MGD, serving an urban population of 810.000 inhabitants and a rural population of 100.000 inhabitants. (Population figures are from the 1950 census.) Total water production as of June 30, 1958, amounted to 86 MGD, of which 85% represented water completely treated and filtered. 11% came from deep wells, which required only a slight application of chlorine, and the remaining 4% was partiallytreated water. Plants are presently under construction at Yauco and Naran jito having respective capacities of 1.6 and 0.5 MGD, and we are completing plans for initiating construction of plants for San Lorenzo (0.7 MGD), and San Sebastián (1.0 MGD). Our new fillration plant program is only lacking the planning and construc tion of installations at Vega Baja (1.0 MGD). Adjuntas (0.35 MGD), and Peñuelas (0.5 MGD), which should have been ac complished successfully by the end of the year 1961. Nonetheless, it will be necessary to continue to expand older plant capacity when increased demand so dictates, as has been the case currently with Caguas and Corozal. In the measure that towns outgrow their old borderlines, water conduits have to be extended further and further in order to serve the new homes and business houses. Through firms that specialize in urban development construction, private industry carries out a large part of the installation of water distribution facilities to serve the expanding population. Firms devoted to urbanization are obliged to construct and turn over to the Authority free of charge the corresponding water and sewerage installations. A similar obligation is imposed on Commonwealth Government hous ing agencies. Prima facie, such a requirement would appear to be unjust. It should be remembered, however, that those who undertake urban development pass on the cost of these installations in the sales price on the lot involved. Furthermore, after taking over these water and sewerage facilities, the Authority assumes the responsibili ty for operating and maintaining them forever after, and to replace them with others of greater capacity at a later date if such action becomes necessary. One aspect of the urban water service program that merits special clarification is that of the application of fluorine to the public water supply. Some years ago medical and dental authori ties arrived al the conclusion that flouride in adequate quantities in the drinking water considerably reduce tooth decay in children. Since 1953 the Health Department has been using the water mains as the means of carrying out the above program. At present flouride is added to water supplied to 67 towns, up to a concen

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tration of 0.8 p.p.m. The seven filtration plants remaining for construction will be equipped with fluorination facilities. The Com monwealth assigns the necessary sums to the Authority for carry ing out this program. B.

Sanitary Sewerage

We mentioned earlier that at the time the Authority came into being, only 42 towns had sanitary sewerage. We set ourselves the goal of supplying so essential a service to every town on the island. Sixty-three towns in all are now enjoying sanitary sewage disposal systems, and the conduits have been installed in six more. Work is also going ahead on the construction of treatment plants in the last-mentioned instances. Of the 75 towns, only 6 do not as yet have sanitary sewerage. Such facilities are already in the project stage for two of these towns, and in the present year we plan to begin studying the layout of the four remaining ones. We therefore anticipate that by the end of 1963 every town and village in Puerto Rico (excluding Culebra island) will be equip ped with public refuse disposal systems and the corresponding treatment plants. However, our Sewerage Project Schedule is more ambitious still: it includes the elimination of septic tanks and certain Imhoff tanks. We consider the latter two types of installations to be inadequate since they do not provide the treatment which in our view should be given to sanitary waste water before they are discharged into bodies of water that as often as not arc used as the natural source of supply for inhabitants in the rural regions who do not have access to the rural water system under construc tion by this Authority for more than 13 years. AV hen the Water Supply and Sewage System Authority began to draw up the projects for sewage disposal plants, the first decision adopted was that of eliminating septic tanks, owing to the un satisfactory refuse treatment results afforded by this process, plus the undesirable characteristics of the effluent and of the sludge produced by the septic action. It was at this point that the Imhoff tank was adopted as an ideal unit for the primary treatment of refuse, since it provides for''sedimentation and digestion in a single structure. A welldesigned Imhoff tank in which the direction of flow can be reversed from time to lime does not require a great deal of attention in operation. Since it works almost automatically, its adoption was felt advisable in those cases in which circumstances did not demand a higher degree of purification. The majority of Puerto Rico’s water courses are used for public consumption by the rural population, and generally speak ing, the level of those waterways is very low during the dry months. It was therefore deemed advisable and imperative in cases in which

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the dilution factor was less than 40 to give a secondary biological treatment to the effluents from the Imhoff tanks, by means of rapid gravel fillers before permitting the waters to flow into the receiv ing water course. In those cases in which the volume of water in the river or brook was very low, an additional chemical treatment was adopted. consisting of application of chlorine to the effluent. The three fundamental types of plants adopted I see descrip tion below) were then modified as required by local circumstances and conditions; and subsequently the activated-sludge process was introduced. Apart from the septic tanks, then, the following three types of plants are currently in operation: 1. Primary treatment, consisting of Imhoff tanks and sludge beds. This system is used where a high purification of the effluent is not necessary because of a high dilution factor or owing to oilier local conditions. 2. Complete treatment by the bio-fillration process, which comprises a primary clarifier, high-rale biological gravel filter, final clarifier, separate digestion tank, and sludge beds. This type of plant produces an effluent having a B.O.D. of 10 to 30 p.p.m. 3. Complete treatment through the activated-sludge process. consisting of a primary clarifier, aeration chamber, digestion tank. and sludge beds. A highly purified effluent results from this pro cess, having a B.O.D. of 10 p.p.m. It is the most efficient complete treatment developed to date. Today, on the basis of experience gained in operating these plants plus laboratory analysis, we can determine which type of plant will best meet the needs of a given location. Factors taken into account include the degree of treatment necessary, initial cost of the installation, annual operating costs, etc. Our experience also warns us that sewage disposal plants will have to become in creasingly complete, complicated, efficient and costly in the measure that the population centers grow if we are to offset in part the complex contamination of surface waters resulting from human and industrial wastes, garbage and other refuse, etc. Only two-thirds of the population in Puerto Rican towns and villages have running water in their homes supplied through plumb ing connections with the public system. In like fashion, half of those users —• that is, one-third of the population — take avantage of sanitary sewerage facilities. This means that when planning a sewage disposal system, it is necessary to carry out a street-by street investigation of the probable users of the conduit system that will be connected with the general sewage disposal facilities. Needless to say, the part of the population that obtains its water supply from public fountains and does not have running water at home, will never use the sanitary sewage system. Even certain of those who do have plumbing in their homes, connecting them with the main water

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supply system, will lack sufficient resources or income to permit them the luxury of costly sanitary installations; they therefore will not become users of the public sewage disposal system. As a consequence of this situation, inadequate home sewage disposal in stallations will continue to constitute a threat to the health of the neighborhood, despite the existence of public sewerage. There are laws and municipal ordinances that oblige the owners of any dwelling or building in the urban zone to connect plumbing facilities with sewage disposal networks; unfortunately. those laws and ordinances are not enforced as strictly as they should be. A great deal could probably be accomplished through public education campaigns to persuade the residents in the areas involved to use existing sewage disposal facilities. Another way to help solve the problem would be to induce plumbing contractors to make agreements allowing low-income groups to install low-cost sanitary facilities and pay for them on an easy installment plan. Moreover, certain industries produce noxious or highlycontaminated refuse which must be adequately treated by the in dustry itself before the effluent can be considered acceptable for discharge into the general sewage systems which were constructed principally to meet normal urban sewage disposal needs. In addi tion, certain types of industries should be prohibited from discharg ing waste materials into the rivers or the sea unless these arc subjected to satisfactory prior treatment. The legal framework exists for charging special rates on sewage disposal services rendered for industries. The rale scale is based on volume and biochemical oxygen demand of industrial waste liquids, or on the equivalent population.

Metropolitan Area Sewerage

The project that has been the greatest in scope of all those un dertaken to date by the Authority is that of the sanitary sewerage for the metropolitan area of the capital, including the cities and urban nuclei of San Juan, Río Piedras, Puerto Nuevo Catano, Bayamon, Guaynabo, and the real estate developments and new urbaniza tion projects constructed or in the planning stage throughout the urban area of the capital, Isla Verde de Carolina, etc. This huge undertak ing, which will serve an area of 30 square miles and a total estimated population of 815,000 inhabitants by 1975, will cost approximately $30,000,000. A project of this magnitude cannot be undertaken without prior planning in the technical engineering field as well as with respect to the economic and political aspects of financing, for its scope and special characteristics call for cooperation and economic participation by the Commonwealth, the government of the capital city, the municipalities involved, the Housing Authorities, the Water Supply and Sewages System Authority, and finally, the home and lot

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owners who stand to benefit from the public works. For purposes of obtaining individual contributions from the latter, a plan is being worked out for assessment in connection with the imposition of special rales. The project can be broken down into the following principal public works:

Type of Project 1.

2. 3.

Preliminary cost estimate

Sewage treatment plant for 24 MGD (susceptible of enlargement to 60 MGD) 42 miles of main sewers, from 18” to 90” in diameter, pumping stations, etc. Submains, lateral sewers, and house connections

TOTAL S

5,600,000

16.100,000

8,300.000

30,000,000

The project has been under construction for four years, and has been financed in the manner outlined below: 1. 2. 3. 4. 5. 6.

Commonwealth of Puerto Rico---------- S 11,130,000 Municipalities that will be benefitted by the project------------------------3,570,000 Housing Authority------------- ------------100,000 Federal Government------------------------1.000,000 Water Supply Authority (bond issue) — 6,000,000 Contributions from properly owners benefitted by the project (special assessment)----- ----------------------8,300,000

Total-------------- $ 30,400,000 As of the current date we have constructed the Metropolitan Sewage Treatment Plant at a cost of 55,780,000 and which is al ready in operation; four main sewers and most of another, at an approximate cost of 56,000,000. I should clarify the circumstances of the federal contribution, which was the outcome of Act #660 of the United States Congress, approved in July, 1956. The Federal Government will contribute substantial sums for the construction of sewage treatment plants and intercepting and discharge sewers. This policy of assistance for the states will benefit Puerto Rico, and the metropolitan sewerage proj ect was the first to obtain federal funds. The initial investment in this case amounted to a quarter of a million dollars, which will build to more than one million by the time the entire project is completed.

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Rural Water Supply Programs

This program is of profound social and economic significance in Puerto Rico. Owing to the country’s population density, all surface bodies of water are obviously contaminated. Our farm dwel ler has been for centuries the victim of diseases originating in a defective water supply. When country folk are supplied pure water, three purposes will have been fulfilled: (a) certain diseases will be obviated, which otherwise would imply medical attention and hos pitalization expenses on the part of the government; (b) the health of this population sector will be improved, with the consequent in crease in productive capacity; and (c) the exodus toward the over crowded areas of the cities will be discouraged. Since very little revenue is produced by these projects, the Commonwealth Government undertakes to supply the funds for their construction. Notwithstanding the fact that the government pro vides the funds, if the Authority were to continue the construction of new rural water systems on an annual basis that cost more to operate then they bring in in revenues, in a few short years these systems would become a heavy economic burden that would make it extremely difficult to sell the Authority’s interest-bearing bond issues. For this reason the Commonwealth Government has agreed to reimburse the Authority for whatever losses may arise from the operation of the small rural water suply systems. Puerto Rico has about 800 rural areas that are subdivided in approximately 3,200 subareas and sectors to which a population of 1,280,000 inhabitants corresponds, according to the 1950 census. Most of these rural subareas or sectors are located at points that naturally are practically inaccessible to existing water supply sys tems. In consequence, it has been estimated that water could rea sonably be supplied for approximately 1.000 sectors, including the rural communities already mentioned, at a cost of 331,307,000. As of June 30. 1958, total rural waler mains and submains constructed exceeded 600. at a total approximate cost of 812.000,000. It is estimated that these systems are serving more than 112,000 families, or some 560,000 inhabitants. Rural projects are divided into three principal types, accord ing to the source of supply utilized, namely: (a) Projects that call for deep well drilling. (b) Independent projects involving the use of a river, brook, or spring, by means of construction of small dams, pipe lines to divert the flow, etc. (c) Projects that merely represent an extension of existing rural or urban water supply systems. Costs, of course, vary in keeping with the type of project in volved.

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Except for cases in which the service is an extension of an urban water main, the treatment ordinarily given water for rural consumption in Puerto Rico consists of only sedimentation and chlorination. The reason for this lies in economy of utilization and operation: It would be costly to operate 600 rural water supply sys tems scattered over 3,500 square miles of territory, and staff them with properly-qualified technical personnel (if such were available I. Hence the treatment provided represents minimum requirements — sedimentation and preventive disinfection with chlorine in order to eleminate pathogenic bacteria. A minimum residual of 0.2 p.p.m. is maintained at the most distant points in the distribution pipe line, in order to avoid possible contamination from another source. Most of the families living in rural areas fall in the low-in come class; hence the water is provided for them free of charge from public fountains. In accordance with a contract between the Commonwealth and the Authority, the latter will maintain any where between a minimum of 2,600 public fountains to a maximum of 3,600, in return for the fixed amount of S360.000 per year. At present 3,300 of such fountains have already been installed. The rest of the rural inhabitants construct house connections. However, by virtue of a low volume of consumption, most of them pay the minimum established by the Authority, of S1.05 per month. Those consuming in excess of 10 cubic meters monthly pay for their water consumption on the basis of the general rate scale prevailing in Puerto Rico. (At these dwellings water meters are installed in the service main or in the house connections.) By the end of 1964 the Authority expects to have completed its rural water supply program, which will have cost 530,000 and will provide service for 160,000 families (some 800,000 inhabit ants) in the rural areas. This will bring to a successful conclu sion one of the most worthy aims of our democratic government: to bring potable water within ready reach of the countryman or woman.

///. PURL1C WORKS AND PROJECT SCHEDULING AND PLANNING Every September the Water Supply and Sewage System Au thority, just as all other government agencies in Puerto Rico, re ports to the Planning Board on all projects it expects to be able to carry out in the following six years, and indicates the correspond ing source of financing. After studying all the recommendations of the various public agencies, the Planning Board prepares its Six-Year Economic Program — trimmed, of course, to conform to estimated economic resources for the period. Certain programs of the Authority that depend on legislative appropriations — san itary sewerage outside the metropolitan zone and rural water

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mains —■ proceed at the rate permitted by the recommendations of the Planning Board in the Six-Year Economic Program mentioned above, unless the latter are subsequently modified by the Puerto Rican Legislative Assembly. The public works and improvement program that the Author ity plans to carry out during the next fiscal year with funds of its own or proceeds from borrowings is submitted for the consid eration of the Board of Governors each year in the month of June. The Authority also submits to the Board its budget of income and expenditures for the operation and maintenance of the water sup ply and sewerage systems. In the case of the Planning Board recommendations that re quire legal appropriations, the Authority prepares draft bills that are presented to our legislature. There they undergo extensive dis cussion on the part of committees of both houses, particularly the Finance Committees which have the greatest share of responsibility in everything referring to the appropriation of funds. Irrespective of whether they are financed with the Authority’s own funds, proceeds from credits or legislative appropriations, individual projects must be submitted together with the correspond ing plans and an explanatory memorandum to the Planning Board and the Department of Health. Until such time as we obtain the approval of both these public agencies, we arc not permitted to start work on projects of any type. The Authority keeps records on the production and consump tion of waler in the different urban nuclei, and on the advent of new users and increased demand resulting from housing projects, urban developments, industrial and tourist trade expansion, etc. These data constitute an essential frame of reference with respect to construction scheduling, number of families to be served, etc. IP. PROJECT FINANCING

Legislative appropriations received by the Authority may be divided into three groups: a) Over-all appropriations for general programs, such as ru ral water systems or sanitary sewerage. b) Specific appropriations for individual projects sponsored by some Congressman in particular. c) Appropriations included in the operations budget of the Commonwealth. Illustrative of the latter type of appro priations are those sums assigned yearly to pay for water consumed from public fountains and part of the water and sewage services provided for residents of public hous ing projects.

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Municipal contributions make up another source oí income. although much smaller in magnitude. On occasion municipalities are extremely interested in having their water supply or sewerage systems enlarged but the project does not justify the Authority's making the entire investment — or. even though the expansion may be economically justifiable, the Authority does not have suf ficient funds available to devote to that purpose. In such circum stances many municipalities agree with the Authority to defray a part of the cost of the projects thus bringing it within the realm of feasibility. Private industry at times also contributes, matching the Authority’s investment in connection with the realization of a given project. The funds of the Authority itself also merit mention by way of resources devoted to project-financing. In the terms of the law that created the Authority, the rates charged users on water supply and sewerage services must be sufficient to cover operating, main tenance and depreciation costs as well as service on the correspond ing debt. By June 30, 1958, the Authority was serving 220,030 users of water supply facilities, who paid $6,809,687. Sanitary sewer age users numbered 100,284, and paid $1,176,701, and the cor responding figures on electric power consumers enjoying services provided by the Authority were 1,522 and $71,605. These items of income, together with the $123,084 produced by investments to which our funds had been channeled and from other sources, brought the grand total to $8,181,076. There is a single rate scale for the island as a whole and for all types of users. At present the first 10 cubic meters of water supplied is charged at the rate of $0.105 each. For water in ex cess of that amount the price per cubic meter gradually decreases until it reaches the level of $0.035 for consumption in excess of 10,000 cubic meters. Users are ordinarily billed on a bimonthly basis, except for those having the highest consumption (schools, hotels, factories, etc.), who are sent monthly invoices. The process of fixing rates to be charged on water supply and sewerage services begins in the Board of Governors of the Author ity. After receiving notice from the Executive Director regarding the new rates, the Board calls public hearings for purposes of dis cussing the proposed modifications. Rates are approved or changed as a result of the public hearings and are then again submitted to the Board of Governors of the Authority for final consideration and definitive approval. An amount equal to the monthly depreciation expense is de posited in a reserve fund for Replacement and Renovation, which serves the purpose the name implies. This reserve amounted to

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81,062,000 in fiscal 1957-58. A dynamic enterprise, the Authority is in constant growth. After deducting current expenses it there fore earmarks 15% of the remainder of its income for a fund devoted to the physical expansion of its installations. For the 1957-58 fiscal year this fund amounted to 8638,000. By virtue of being a govern ment agency, the Authority presumably is a non-profit organiza tion. However, there is always a modest operating surplus at the end of the year, half of which is devoted to reducing the long term debt and the remainder to whatever purpose may be designated by the Board of Governors. Ordinarily the Board authorizes the use of these funds in capital investment projects, thus cutting down the amounts that must be obtained from borrowings. In order to realize basic, self-liquidating projects, the Author ity can call on the broad securities market in the United States of America. However, to be in a position to place its bonds at the most favorable terms, the Authority must be able to present an attractive economic outlook and know how to choose the most propitious moment. It is in this respect that the Government De velopment Bank of Puerto Rico plays a highly important role. The Bank provides advance credits to public corporations until such time as the latter are in economic circumstances that permit them to offer their bonds on the market. Thus, for example, during our first three years of operations the Bank lent the Authority 87,000,000, enabling us to begin work on the Rio Grande de Loiza project; otherwise, it would have been necessary to wait until mid-1949 when the Authority was able to float its first bond issue. The commercial banks constitute another short-term credit source available to the Authority. At present we have a loan contract for 87,500.000 with our trustee, the Chase Manhattan Bank. Our total outstanding borrowings to dale amount to 828,500,000. On the other hand, the value of our physical plant in service cur rently is 8112,000,000, compared with the original figure of 820,000,000 at the time the municipalities turned over their water supply and sewerage systems to the Authority.

F. SPECIAL PROBLEM OF DEMAND FOR WATER FOR INDUSTRIAL PURPOSES The fundamental goal or objective of the Industrial Develop ment Company’s Tentative Regulatory Plan for the Industrial De velopment of Puerto Rico is to establish 2,500 additional industries between the year 1955 and 1975 with a view to raising the stand ard of living of the Puerto Rico people to the level currently en

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joyed by the people oí the United States. In that Plan the Com pany estimates that it will he necessary to provide the following additional supplies of water for industrial purposes: (a) By the year 1964---------------------- 45 MGD (b) By the year 1967 --------------------66 MGD (c) By the year 1975 --------------------- 100 MGD Industries to be developed include 100 of the heavy industry classification, 650 semi-heavy, and 1,750 light or "dry" industry. The latter consume water for the use of employees or to meet other minimum needs, while the semi-heavy need moderate amounts of water for the manufacturing process, and, finally, the heavy in dustries use huge quantities of water for purposes of cooling, man ufacture, and for still other needs. The magnitude of this sudden demand for water is evident when one considers that the total amount of water that the Author ity presently provides for the entire island amounts to only 86 MGD. Initial costs of installations in Puerto Rico to store, purify, car ry and distribute one MGD of water ordinarily fluctuate between 3500,000 and 8800,000. Taking the average value, we find that an investment between 830,000.000 and 865,000,000 will be re quired to provide 45 to 100 MGD for industry. The Governor of Puerto Rico has named a committee to study this problem and seek feasible and economic solutions from the tech nical, engineering point of view as well as project financing. This committee is made up of the Planning Board, the Water Resources Authority, the Water Supply and Sewage System Authority, the Industrial Development Company, and the Government Develop ment Bank. Obviously, the first thing to do is to make an inventory of all possible sources of supply, whether subterranean or surface, that can be tapped in Puerto Rico. As already mentioned, a joint project is being carried out by the Economic Development Ad ministration, the Water Resources Authority, and the Water Supply and Sewage System Authority to study thoroughly all of Puerto Rico’s hydraulic resources, with a view to utilizing them in the most efficient manner possible. It is well to remember at this point that for some time vari ous agencies have been exploring the possibilities of converting salt water into potable water, by various mechanical, physical and chemical means. However, to date the cost of production has amounted to some 82.00 per thousand gallons, thus making the con version impracticable.

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Everything seems to indicate that the only practical solution to this problem of satisfying the growing and pressing demand for water for industrial uses will consist in using the same water over and over again in its flow to the sea, insofar as the lengths of the corresponding waterways will so permit. It will therefore be im perative that each heavy consumer purify the water after using it. and before sending it on its way for use by the shoreline inhabit ants downriver, and by other large industrial consumers. Other wise, the latter would have at their disposal only dirty, contaminated and useless water for the processes which today are so vital in every civilized country.

ECONOMIC PLANNING SEMINAR

PLANNING OF INTERNAL TRANSPORTATION By The Hon. Roberto Sánchez Vilella Secretary of State and Secretary of Public ¡Forks

OUTLINE

PLANNING OF INTERNAL TRANSPORTATION

Greetings to participants and general outlines of topic for discussion

II.

Internal transportation facilities in Puerto Rico A. Our dependence on an adequate highway system. (1) Elimination of the railroad (2) Air transportation (3) Motor vehicles

III.

Planning and its importance for internal transportation A. Necessary coordination between planners and highway engineers B. Work of the Planning Board (1). Instruments adopted by the Planning Board with respect to internal transportation

IV.

Long-term planning A. Socio-economic factors for consideration (1) Projections B. Determining capacity and length of the highway system C. Project financing

Specific project planning A. Future traffic estimates

VI.

Establishment of priorities

VII.

Conclusion

PLANNING OF INTERNAL TRANSPORTATION By

The Hon. Roberto Sánchez Vilella Secretary of State and Secretary of Public Works It gives me great satisfaction to take part in the present eco nomic planning Seminar. My presence here is not as an expert in economic projections, nor yet again as a specialist in procedures and techniques in connection with the preparation of Regulatory Plans. During recent years my principal role in Puerto Rican gov ernmental activities has been rather that of an administrator than that of a planner. As Secretary of Public Works my principal function with respect to budgetary requests has been that of evaluat ing the different programs under my supervision and to solicit funds in keeping with that evaluation. I am here solely as a public official whose decisions are in large part governed by the aims and results of the planning ac tivity and who therefore is in a position to comment on its limita tions and benefits. In the course of my daily work I have observed the benefits derived from integral and long-term planning. For this reason I am every pleased to see the great interest in planning that is in evidence in the present Seminar. I have been asked to talk to you about internal transportation planning. I shall begin my approach to the topic with a brief discussion of the internal means of transportation utilized in Puerto Rico, citing examples and giving illustrations that should serve as the general framework for the over-all explanation. Secondly, I plan to outline the importance of the planning of transportation lines and our dependence thereon; and thirdly, I will undertake to pre sent a general explanation of the different factors, procedures and methods connected with long-term planning and in the planning of specific projects. All of you are aware of the importance of, and need for, a good transportation system for purposes of a country's economic ex pansion. This is most noteworthy in areas that rapidly improve their economies and their standards of living by means of intensive agricultural or industrial activity. Such is the case of Puerto Rico. To attain the objectives established, a rapid, efficient and economic al transportation system must be developed.

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There are various means of setting up an adequate transpor tation system to provide for the rapid movement of people and merchandise, such as the use of airplanes, helicopters, ships, rail roads, motor vehicles, etc. Puerto Rico has no internal water trans portation since the rivers are not navigable and navigation in our coastal waters is very slow. It may be said that the railroad for all practical purposes has ceased to exist. Therefore, our internal transportation systems depends almost completely on highways and a certain amount of air traffic. Twenty years ago the island’s land transportation system was relatively satisfactory. Ever since the times of Spanish domination — the XVI lo XIX centuries — the island’s prosperity and de velopment were understood to depend in large part on a system of adequate highways. Despite recognition of this fact, and owing to the lack of resources, progress was rather slow under the Spanish government. The highway construction program was much more intensified after the advent of Americans to the island. Together with the railroad, which almost completely circled the island, our highways constituted our basic internal transportation network. However, following on the adoption by our government of the eco nomic development program, the population’s income began to in crease, and the enhanced purchasing power enabled people to satis fy the desire to own an automobile. Railway passenger traffic be gan to decline and virtually disappeared shortly after the second World War. This means of transportation came to be used almost exclusively for freight movement, principally sugar cane. How ever, competition from trucking was very keen, and the trucks of fered so many advantages in comparison with railroad services that they began to handle an increasing share of the freight movement. Even sugar cane began to be transported from the plantations to the refineries in trucks. The Railroad Company found itself in increas ing financial difficulties and finally failed, thus almost completely eliminating the railroad from the internal transportation pattern. For all practical purposes, then, our highways are the only means of internal transportation on the island. Despite the expan sion in air traffic, it does not yet occupy a very significant place in the field of internal transportation. Inexpensive trips by heli copter have not yet arrived, and even though internal air transpor tation is expected to continue to increase, it is estimated that even in future years a comparatively low percentage of travel will cor respond to that means of transportation, as compared to total high way traffic. For the above reasons, I plan to limit this part of the discussion to the role played by highways in the internal transpor tation system. Motor vehicles have come to occupy a unique place on our is land. not only by virtue of constituting the principal means of trans portation. but also because they have come to be an indispensable

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part of our daily lives. The worker uses the automobile to go and come from his job; the housewife, to go shopping; the stu dent rides to school in an auto or on a bus; and the entire family depends on the automobile for many of its social and recreational activities. Although dramatic, increases in the number of motor vehicles and miles traveled do not fully reflect the continual and ever-in creasing demands being made of our highway system. There has also been an increment in the weight and speed of the vehicles — factors that have contributed even further to the seriousness of our highway problem. Evidence of the rapid development of highway transport is had in the heavy congestion we find today on the principal traffic ar teries. This daily movement of persons and merchandise in the urban and rural areas has become a difficult and complex prob lem. Simply stated, our highway problem derives from the fact that the program of improvement and expansion in the highway net work has not been able to keep up with the rapid growth in traf fic. Since the end of the Second World War there has been a con siderable increase in motor trips in the metropolitan area of San Juan. At an ever-increasing rate the existing highway network has been feeling the impact of the additional traffic generated by the continuous urban growth in that area. In certain sections of our highway system —■ particularly those near the large urban developments on the outskirts of the metropolitan area — increases in vehicle traffic between 1952 and 1957 have amounted to as much as 800%. Our rural highways have also been seriously affected by in creases in the weight of autos and trucks. The rapid advance of our industrialization, coupled with the disappearance of the rail road, have been significant factors in the increased use of our highways. When discussing the planning of our internal transportation system, we should keep in mind the principal purpose our high ways are intended to serve. Not only should they make transit possible: they must also serve the community by furnishing feeder roads and rights of way. To provide access to private property is one of the principal functions of highways, and each part of the highway network fulfills this purpose in some degree. Land owners are the principal beneficiaries of this service and therefore have a direct or personal interest in those highways that communicate with their particular piece of property. Further, intracity and in tercity services must be provided. To facilitate communal life is another of the important functions of highways of all types. Any com munity’s principal objective with respect to providing highway facili ties is to achieve standards of improvement that will enable the high

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ways to handle adequately the movement of persons and goods gen erated in the daily process of the marketing of products, purchase and sale of supplies, going to and coming from work, school, etc. High ways also serve a variety of government purposes: The manage ment of various essential government functions, such as the postal service, education, national defense, etc., implies direct use of the entire highway system and in some cases makes it necessary to provide additional facilities which would not be required for strict ly private purposes. The foregoing discussion of the purposes and functions of high ways emphasizes their importance for our daily living and gives an idea of the responsibility of the officials who have to do with high way development. In complying with their duties, these officials at times are called on to make decisions whose influence is felt beyond their own sphere of action. Just as wars are too important to be left to the generals alone, so also highway planning is too important to be left exclusively to highway engineers. Highway officials do not feci any less important for all that, and they are eager to cooperate with other government executives — planners in particular — and thus assure that highways will better serve their intended purposes. Our present economic development program reserves a very important function for highway transportation. The goal set by that program calls for a standard of living in Puerto Rico by about the year 1975 that will be comparable to that prevailing in the United Stales in 1950. Therefore, this assumption should guide the planning, design and construction of the highways that will be required to carry the anticipated traffic loads in future. Projec tions made by the Planning Board indicate that some 400,000 ve hicles will be in use by 1975, compared with the present figure of 133,554, or an increase of approximately 300%. This forecast unquestionably constitutes a challenge to the highway engineer. Our efforts will be channeled mainly toward the establish ment of a balanced and orderly highway construction program in order to meet the transportation needs of the different places on our island. Effective coordination of the efforts of engineers, gov ernment officials and private enterprise in advance of real estate development (which in turn generates motor traffic) will encourage better use of highways and thus permit maximum operating ef ficiency with the consequent economies in terms of time, money and lives. Transportation planning is the instrument that will system atically determine traffic needs as well as the most practical ap proach in satisfying those needs. It is a generally accepted fact that integral planning is very desirable and necessary in order to permit an adequate appraisal of development needs and effect a better distribution of the limited economic resources available. Therefore transportation planning,

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especially in those countries that are in process of rapid economic development, should he adjusted to, and coordinated with, the other general planning aspects if it is to serve as an effective develop ment instrument. Although the principal responsibility with respect to highways in Puerto Hico rests with the Department of Public Works, other governmental agencies also have certain duties in the matter. Planning has played a role here during more than a decade, in connection with the formulation and execution of government policy. In every line of activity the primary responsibility for this function has fallen to the Planning Board of Puerto Rico. That agency’s sphere of action includes giving information, formulating plans and programs for governmental activities, reviewing other agency programs, establishing and applying urban planning controls, and making recommendations on the appropriate policy for guiding the island’s physical and economic development. To assist in carrying out its broad assignment, the Board has established a number of instruments such as Economic Reports to the Governor, the Six-Tear Economic Program, individual Regulatory Plans, preparation and enforcement of Zoning and Lot Distribution Regulations, review of public works projects, and many others. It has also developed valuable planning techniques. To guarantee the civic participation that is so important to a de mocracy, and to afford to the technicians the benefits deriving from the ideas growing out of such participation, a great deal of emphasis is placed in all these processes on holding public hear ings that provide any citizen with the opportunity to contribute his ideas and be heard. To guide this Board activity, and by way of summarizing its recommendations for the development of Puerto Rico, the Planning Law calls for the preparation of a Regulatory Plan that seeks to present the most complete picture possible of what Puerto Rico is today and can be expected to be in future. The Regulatory Plan consists of a group of documents that outline and analyze the de velopment plans of principal government agencies, economic activi ties, and the outlook for the growth of specific areas and regions. The Plan’s basic purpose is to guide and coordinate all these phases of economic activity in such way that the various development proc esses will be accomplished by employing the most economical and practical means available. Within the group of planning instruments there are several that have a direct bearing on transportation: Zoning and Lot Dis tribution Regulations, Official Maps, Urban Renovation Projects, Regulatory Plans, etc. Certain aspects of these planning tools are outlined below. Zoning Regulations control the localization and density of the various real estate developments that of themselves generate traf

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fic. At present we have zoning maps for most of our municipal ities, and maps for the remainder should have been put into effect within the very near future. Zoning guides the direction of the development and use of land and is thus able to encourage a bel ter use of traffic circulation facilities. Zoning also contributes to the formation of residential and industrial districts in areas already served, or to be served, by present or prospective communication lines. Special provisions specifically related to traffic problems are included in zoning regulations. For example: parking space requirements within the limits of the lot, to avoid parking in the street; and the obligation to allow room for loading and unloading facilities when new buildings are constructed. Special emphasis on adequate parking space is given in the case of trading centers, recreational areas, and other activities that are likely to generate a heavy traffic volume. As mentioned earlier, Lot Distribution Regulations also have a favorable effect on transportation planning. These rulings require that sponsors of urban development projects construct street and other circulation facilities and turn them over to the government. and follow a pattern of street layout adapted to the best general development of the area as determined by the Planning Board. The Official Map is used as a means of preventing the erec tion of structures within the right of way of future major pub lic traffic arteries. This process consists in laying out and marking on the land itself important public thoroughfares (highways, free ways, avenues, main streets) in the principal cities in order to regulate the building of permanent structures, limiting them to the physical requirements of these future transportation lines. If this were not done, it would become necessary later to purchase such structures in order to be able to construct the highways. This, of course, would increase the cost of the projects considerably and would in certain cases make their expense prohibitive or construc tion quite impossible of realization. The aforementioned tools are based on. and complement, ur ban regulatory plans for the development of our cities. They rep resent the conclusions of the Planning Board as to the most ade quate way in which our cities should be developed, taking into consideration projections on population growth, income, and other social and economic factors. These conclusions include the most satisfactory land-use pattern (residential, industrial or business areas, parks, schools, hospitals, etc.), as well as the public facilities and services required for that development, including transporta tion lines. By way of a recommended urban transportation system, the Regulatory Plan for Principal Public Arteries has been prepared for the metropolitan area of San Juan. Similar documents will have to be drawn up for other major cities on the island. Many

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of lhese are in process of preparation or have been completed in draft form. Construction of highways outside the urban zones has followed the general lines established by the Regulatory Plan for Insular and Municipal Highways. This document, on which island high way construction and improvement programs have been based, contains recommendations on the general localization of new high ways for construction; improvements needed on existing highways; and design and construction standards to be followed when carry ing out such construction and improvement projects. All these documents are subject to periodic revision, in the measure that changes take place in economic, physical, social, and other development circumstances. This is even more imperative in a country whose development is in process of rapid evolution. In Puerto Rico many regulatory plans are currently undergoing revision, including the Regulatory Plan for Highways. In our country all these documents are used solely in relation with specific project planning. This is partly due to the fact that economic projections prepared heretofore have been founded on the development of the island in general and thus do not take into account existing regional differences. This circumstance has made it dif ficult to prepare a general or over-all highway plan which would reflect variations in economic development anticipated for the vari ous regions of the island. The same comment applies to the pop ulation estimates prepared by the Health Department with the co operation of the Planning Board. These estimates refer solely to population growth forecast for the island as a whole: hence they do not in any way reflect the variations anticipated in the different municipalities or regions in response to differences in rates of in crease in emigration and births. In consequence, projections prepared with respect to vehicle traffic and the cost of the projects required to take care of such traf fic, often turn out to be too low. As an example, I should like to quote a paragraph from the Regulatory Plan for the Develop ment of Insular and Municipal Highways, as revised in 1950, which reads as follows: “Annual variations in vehicle registration were analyzed. It was established that the number of motor vehicles increases considerably year by year, to the point where total registra tions rose from 16,000 to 32.000 in the decade from 1932 to 1942 —■ a figure which reached the 55,000 level in 1959. Studies on the upward trend lead to the conclusion that by 1970 the total number of motor vehicles may be in excess of 100,000.” If we compare the 1970 estimate with the present figure on motor vehicle registration, we find that it was already exceeded in

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1958, when the total number of vehicles registered reached almost 134,000. Since the determination of our highway system needs or re quirements is based principally on estimates of future traffic flow, cost calculations prepared in connection with these new projects have also been excessively low. By way of example I should like to refer once again to the Regulatory Plan for Highw’ays mentioned a few moments ago. In this document, approximately 8150,000,000 are calculated as the total cost of the projects required to take care of the previously-estimated traffic flow for 1970 — some 100,000 vehicles. Based on a projection of 220,000 motor vehicles by 1976, more recent studies carried out by our Traffic Bureau point to projects having a total value of some 8-100 to 8500 million. This problem becomes even more serious if we consider the fact that it takes approximately four to five years for the complete execution of a given project for an avenue or major highway (from the initiation of preliminary studies until construction begins) dur ing which time the various economic factors and assumptions that formed the original basis for the project frequently undergo serious change. This, in turn, often leads to inadequate or obsolete high ways. For the foregoing reasons, I plan to discuss specific project planning separately from long-term planning. In the following ob servations on long-term planning I should like to call attention to the fact that many of the procedures and techniques I shall describe have been in use in Puerto Rico: however, others of the ones I mention have not been fully developed in this country to date. One might say that the process of long-term planning involves finding the answer to three questions: 1. What are the social and economic factors that create the need or demand for improving the highway system, and how may they be measured? 2. What types of highways and how many miles of each are needed in order to satisfy our present and future requirements? 3. How much will such projects cost, and how can they be financed? With respect to the first question, it is necessary to evaluate the current situation as well as trends in evidence and in prospect. Adequate planning depends wholly on accurate information obtained by means of a research program which comprehends the gathering and analysis of basic data: for example, population composition and trends, income, general characteristics of industrial, agricultur al and commercial development as reflected in the types of trans portation called for by such events, the registration and use of private motor vehicles. All these elements, of course, should be con sidered not only in the light of the present situation but also in

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connection with future projections. This will permit us to remedy current deficiencies in our highway system and prepare for meet ing the continually-increasing demand forecast for the future. New highway construction as well as improvement of existing roads should he based not only on present traffic flow but on the estimated number of future users of such lines of transportation. Just as in the case of any other types of estimates, vehicle move ment pattern projections represent only an approximate calculation of what is likely to happen in future. We see that the task is not a simple one since movement patterns are affected by factors such as population; real estate developments; cost, quality and amount of the different forms of transportation; distribution of families within different income groups; and others, such as hours of going to, and coming from, work; and recreational and social habits. To predict future traffic is especially difficult in areas under development, not only because existing historic data are limited plus the difficulty of determining future economic trends, but also because of the need for more research and data to correlate im proved economic circumstances with traffic growth. It has often occurred in the past that traffic estimates and projections have been too low, in other parts of the world, as well as in Puerto Rico. In some cases this circumstance is attributable to a lack of correlation between economic progress and increased motor vehicle registration; to underestimating the degree of depend ence on the automobile, which daily becomes more marked: and to underestimating the effects of highway construction itself on the economy and ways of life of the society involved. A common practice has been to predict vehicle registration on the basis of past data, utilizing population growth comparisons. Estimates prepared in this fashion ordinarily have turned out to be too low. The Planning Board is working on the preparation of estimates of the number of vehicles, taking into consideration various meas ures of economic development and establishing a correlation between the number of motor vehicles and net income. As indicated in other lectures presented in this Seminar, the Board has worked ex tensively on the preparation of income estimates. An analysis has been made of the interrelation between net income factors and vehicle registration in various slates of the United States, under the assumption that this will lead to more accurate projections for Puerto Rico. An alternate method for determining future automobile reg istration, which is currently under study, is to establish compari sons of automobile ownership by family income group in Puerto Rico with similar data on other areas. Since our economy is in tegrated with that of the United States and since it is anticipated

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that our economic situation in 1975 will be similar to that of the United States in 1950 as mentioned earlier, we have used that coun try for purposes of our comparisons. These estimating procedures will only give a general idea of what the future situation of the island -will be. When planning specific projects it is necessary to conduct more detailed studies which will be discussed later at greater length. I shall go on now to the second question in the long-term plan ning process: “What types of highways and how many miles of each are needed in order to satisfy our present and future require ments?” Apart from finding out how much traffic will have to be han dled in future, it is equally important to determine what capacity each type of highway of varying design and characteristics will have to have in order to accommodate that transit movement. For effective planning, studies on highway capacity are basic. High ways arc limited in terms of the amount of traffic they can carry. and when the maximum capacity is reached traffic is reduced dras tically both in point of volume and speed. Once the maximum capacity of a highway is reached, any attempt to use it for an ad ditional number of vehicles simply results in reduced speed. This leads to traffic jams on the highways, and once this occurs the length of the average trip increases rapidly, and in like proportion the number of vehicles that can use the highway diminishes. It is a well-known fact that motorists judge the attractiveness of a given route by the total time it takes them to get from their point of origin to where they want to go. Any evaluation of the services rendered by the highway system therefore needs to give a great deal of weight to the time measurement corresponding to travel over the roads involved. Time lost in travel through a cer tain area is an index of congestion and can easily be converted into monetary terms; and travel time is also a valuable factor when determining the amount of traffic that can be expected to use a new highway. The most common measurement of highway traffic is the an nual average of daily transit. Although that measurement is useful for certain purposes such as determining the types of pavement that should be provided, it does not directly indicate the number of lanes necessary or other geometric highway design requisites involved in giving satisfactory service for the motorist. Only on rare occasions does the traffic on a given day coincide with the annual average of daily traffic. Obviously, therefore, facil ities designed to handle the average transit per day would be in adequate for most of the year. Therefore, engineers agree that in addition to daily average traffic it is also necessary to consider traffic variations or fluctuations, as well as the relationship between the daily averages and hourly peaks.

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There arc vast differences in traffic volume at different hours of the day and different hours of the night, and a highway would be ideally designed if it could accomodate the highest traffic. How ever, it is not economically reasonable to design a highway with sufficient capacity to accommodate peak loads during the year. Specialists in the field have concluded that the volume of traffic corresponding to “the thirtieth hour” constitutes the point at which the great majority of the various volumes of traffic can be taken care of without resorting to extremely costly and excessive facilities which would be required only in a few instances of peak loads. Ordin arily this criterion is applied in rural areas of Puerto Rico. However, in urban zones and in certain rural regions it becomes necessary to use the absolute maximum volume per hour. The thirtieth hour” volume is ascertained by listing the highest hourly peaks in descending order for the year and taking number 30 on the list. Since traffic loads are generally expressed in terms of daily averages, it has become necessary to establish a correlation between two factors: average daily traffic and “thirtieth hour ** traf fic volume. This has been done by investigating the ratio between the two factors in a large number of cases on different types of highways and then using the average per type of highway (ex pressed in percentage terms) as a correlation factor. For example. in Puerto Rico wc have been applying a factor of 7% to 8% in the case of urban highways, and 9% to 11% on first-class rural roads. The type of highway to be used is chosen on the basis of these traffic loads or “design hours.” For each type of highway a list of standards has been set up, including such elements as: type of paving, width, visibility distances, curve radii, etc., and each section of existing highways is tested against, or classified accord ing to, those standards. This gives us the figure on total number of kilometers of highway of each type, for construction, reconstruc tion, or improvement purposes. On this basis costs can be deter mined covering the total program. This is also very important in connection with the establishment of priorities on construction, re construction, or repair of our highway system — a topic to he dis cussed later in greater detail. Now we have come to the third question: “How much will such projects cost, and how can they be financed?” The principal point of reference in determining costs is the type of highway involved. For each type care is taken to identify principal cost items, including right of way, grading, paving and structures, etc. The cost of each of these items is influenced to varying degree by changing traffic and vehicle characteristics. Cost estimates must also take into account the element of topography or characteristics of the terrain (level, semi-level and mountainous).

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Annual government expenditures must necessarily be defrayed out of reserves from accumulated yearly revenues of the Common wealth or loan funds. Very seldom do countries under develop ment have sufficient reserves accumulated to finance their proj ects: They almost always depend on current income and bond issues. The Puerto Rican government, for its part, has had re course mainly to these last two sources, and has also received fed eral aid for highway financing. This assistance is the same as that regularly afforded the federated states, the District of Columbia, Hawaii and Alaska in connection with their respective public high way programs. Under this arrangement the United States govern ment contributes approximately half the construction costs and in some cases half the expenses of establishing right-of-way, and the cost of preparing plans on highways included within the so-called “federal aid system.” For its part, the Commonwealth of Puerto Rico contributes the remaining half of construction costs, and de frays the entire cost of right-of-way on secondary roads. Collections of appropriate revenues (mainly gasoline taxes and excise taxes on vehicles, parts and accessories) when compared to appropriations and expenditures on our highways are not necessari ly equal. Our government’s policy has been that revenues derived from a given source do not necessarily have to be devoted exclusive ly to solving problems originating with that source: The entire ac cumulation of revenues may be employed to meet the general needs of the country, and appropriations are assigned in keeping with a certain, established order of priorities. Expenditures on our highway system have been increasing in recent years, but the same is true of the revenues indirectly gen erated by the system itself. For example, there has been a sub stantial increase in collections of taxes on gasoline and lubricants, excise taxes on motor vehicles, parts and accessories, and fees charged in connection with automobiles, trucks and buses, such as license plates, drivers’ licenses, and driving tests. In combination, income obtained on various counts from highway users has exceeded expenditures on capital improvements and road maintenance. In this fashion, then, increased expenditures on highway construction result in an increment in the number of users of highway services and, by the same token, in the income received by the government from those users. Highway construction may therefore be considered in the nature of a self-liquidating activity. For purposes of specific project planning, more detailed studies are carried out with respect to data on present trends and on vari ous economic and social factors, such as: proposed land develop ment, population estimates, quality and cost of the various existing means of transportation, principal occupations of the population in the areas involved, working hours, recreation facilities, purchas

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ing patterns, social habits, and others, Studies of this type are prepared principally for those sections of highway having a high construction priority, as we shall see a little later. To enable an adequate estimate of the growth of traffic in future as related to the different highway projects we have been using information compiled or obtained by other government agen cies such as the Economic Development Administration, Port Author ity, and Planning Board, covering the specific activities that those organizations plan to carry out within specified (ordinarily short ) periods of time. Our Traffic Bureau periodically collects and com piles data on manual and mechanical traffic counts at different points along the highway system and studies the origin and destina tion of individual travel and conducts personal interviews in the area affected by the project in particular. Since the traffic pat tern is subject to the influence of so many diverse factors, it is necessary to make a general evaluation of them all. A general knowledge of all those factors is required in order to be in a posi tion to make reliable estimates on future traffic flow. The objective of highway planning, as I mentioned a bit ear lier, is to remedy existing deficiencies and make provision to meet the traffic demand forecast for future years. Several methods or procedures have been used in estimating this traffic growth. V, hen sufficient data is available — past as well as present ■— and infor mation is had on prospective developments in the near future that will affect traffic flow, the task of predicting traffic loads is some what easier, and the corresponding projections are generally more accurate. When planning specific projects, traffic volumes for purposes of design are estimated on the basis of present traffic flow plus the expected increase in traffic by the end of the period covered in the program involved. The period is usually from 20 to 25 years, and the estimate covers the useful life of the highway development proj ect, granting reasonable maintenance. It would probably not be advisable to plan for longer periods, because of the possible changes in the general economy, the population, and in the development of real estate; and it would not be realistic to attempt to arrive at highly accurate predictions at so long a term. Present traffic is defined as the amount of traffic over a specific road if the latter were open to such transit at a given moment. In the case of existing highways, present traffic is made up of actual traffic flow plus that which would be attracted from other high ways if the original road were to undergo improvement of some sort. For new highways, present traffic means exclusively that which would be attracted to their use. This figure is usually ob tained through traffic counts on various existing highways in the area and on the origin-destination studies mentioned earlier.

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The traffic estimate and increment is gauged by adding to normal traffic growth, generated traffic, and traffic arising from real estate developments adjacent to the highway. By normal traffic growth we mean the increase in traffic load in response to the gen eral increase in the number and use of motor vehicles. Generated traffic is that created as a result of a new and more attractive highway; and what we might call “development” traffic is the movement occasioned by real estate developments adjacent to the highway. Data on land-use patterns are essential to reasonable ac curacy when projecting traffic flow. It is also very helpful to have advance knowledge not only of how much traffic will be generated by a new factory, a new shopping center, office building, or res idential development project, but also of the probable effects of the new highways on population distribution and subsequent land use patterns. Zoning information is particularly useful in determi ning this prospective traffic, as is data obtained from the Economic Development Administration and other agencies on specific loca tion of factories and other buildings and institutions. Now we come to the topic of the establishment of priorities or program scheduling, another of the problems that must be at tended to by planners as well as engineers in charge of highway construction. To achieve the integral development of our island we must set up a system of priorities to govern highway construction and improvement. This is one of the most important and difficult prob lems that we have encountered in highway administration. Priori ties must be established for new projects in such way that the most important facilities from the standpoint of benefit to the community are constructed first. To fix a relative order of importance that will be valid from different points of view is the principal objective of a system of priorities. Criteria to be applied will include such factors as: community interests, availability of funds, other public works in the municipality, costs and benefits, etc. The first-men tioned, community benefits, really constitute the measure of the merits of the project with respect to the community in general. Within this classification it is necessary to evaluate its importance to the community and its contribution to healthy civic development. Studies on costs and benefits have been used to appraise the economic merits of many engineering projects. Despite the fact that in many cases the social advantages of a given project cannot be measured quantitatively, the benefit-cost ratio is nonetheless a valuable tool. Here in Puerto Rico we have undertaken studies of this type on different areas for the purpose of evaluating the advantages of providing highways for a number of sectors where retarded agricultural development was attributed to the lack of ade quate transportation lines. Information obtained included socio

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economic data, such as population, schools, health services, pos sible increases in production of agricultural produce and in prices, reduction in spoilage of farm products, possible increments in land values and taxes, estimates of traffic likely to be generated, and the length, localization and cost of the proposed highways, in other instances the benefits to users in terms of savings of time and re duction of accidents have been evalutated. As mentioned earlier, each highway proposal is tested against a list of desirable stand ards, and those projects having the highest rating in terms of the foregoing factors are assigned the highest priorities. These priorities as related to projections must be revised period ically on the basis of changing circumstances. Thereafter they should be coordinated with other permanent public works programs of the community. In Puerto Rico this coordination is sought through the Six-Year Economic Program mentioned earlier, lhe greater the detail in which these priorities are defined, the greater the probability that the programs prepared by the different in dividual agencies will be directed toward achieving the government s general objectives with a minimum loss of effort. I trust that the foregoing explanation has given you an idea of the problems we face in highway planning, as well as of the techniques and procedures we have employed and continue to de velop in our endeavor to solve those problems. I am sure that the discussion among yourselves at this point will lead to a clearer comprehension of those techniques. Undoubtedly you will have suggestions for their improvement in some instances, which will unquestionably be to our benefit also. It has been a great pleasure for me, gentlemen, to have been with you this morning.

ECONOMIC PLANNING SEMINAR October 27 — November 28, 1958

MARITIME PORT DEVELOPMENT PLAN - AN OUTLINE OF FREIGHT MOVEMENTS IN PUERTO RICO By Dr. Miguel Echenique

Bureau oj Economics and Statistics Planning Board oj Puerto Rico

Lecture prepared for the Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

MARITIME PORT DEVELOPMENT PLAN - AN OUTLINE OF FREIGHT MOVEMENTS IN PUERTO RICO By Dr. Miguel Echenique

Bureau of Economics and Statistics Planning Board of Puerto Rico

Perhaps the best way of illustrating the method followed in setting up port development plans is to explain the various stages involved in formulating the recently-prepared plan for the port of San Juan. The process was divided into two stages. The first consisted of an estimate of the needs which must be satisfied. Port needs are defined in terms of maritime freight movement anticipated for the specific facilities under study. In practice, of course, it is not only necessary to forecast over-all volume, but the types of freight which at any time may become relevant in point of necessity to provide special installations or wharves. The second stage is completely specialized and has as its pur pose the localization and design of port installations in accordance with predicted tonnage. Completely distinct in point of subject mat ter, the two stages were also separated as regards the respective agencies responsible for their realization. The first was assigned to the economic planning unit of the Planning Board. The reason back of the Planning Board’s participation is sim ple: When forecasting or projecting future freight movement through maritime ports, a fundamental role is played by the evolution an ticipated for the economy. In other words, both economic de velopment projections and maritime tonnage projections should be consistent. Therefore, the same technical department or group of persons responsible for preparing economic projections of a gen eral nature is also placed in charge of working out maritime ton nage projections. Using the tonnage projections, the secorid stage takes up the specific needs in terms of ports, docks and harbor installations and falls to the appropriate specialized agency — the Port Authority. Through this type of coordination between the central planning body and the agencies in charge of particular programs a criterion

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of unity is contributed to the over-all development plan for Puerto Rico. Maritime tonnage projections: dry cargo

Special installations that ordinarily are located away from the usual docks are required for the transfer of liquid maritime cargo — oil and syrups. Further, the volume of this movement, at least in Puerto Rico, is quite high. For example, in the fiscal year 195657, out of a total import tonnage of only 4.2 million, petroleum imports alone accounted for some 2.3 million tons. In view of these circumstances, the preparation of projections has been limited to dry cargo: i. e., cargo that is not moved by special tankers. A problem which customarily arises in planning is the need to plan for specific projects in specific places. This means that apart from forecasting economic variables for the country as a whole, these variables must be projected for a concrete region or locality. Hence projections prepared in connection with the develop ment plan for the Port of San Juan must refer to freight move ment specifically anticipated for that port. In reality, however, the only way of gaining an idea of certain economic variables is to consider them as integral parts of a whole. It is that whole which ordinarily is susceptible of forecasting since it of itself — but not its component parts — is determined by general economic growth. For this reason, projections of the maritime tonnage to be moved through the San Juan port were initially based on projec tions for Puerto Rico as a whole, which were later broken down in order to calculate the share which would correspond to that port.

Total Import Tonnage: Real and Expected Growth

When calculating the total movement, imports and exports were analyzed separately. The simplest way of projecting imports would be to study past trends and extend them into the future. However, imports are composed of an infinite series of products that follow completely disparate trends. Theoretically, then, the ideal method would be to break imports down into the greatest number of articles possible and project each separately. In practice, of course, it would be almost impossible to adhere to this other methodological extreme. Therefore, the procedure decided on was to classify imports ac cording to a series of homogeneous groups for each of which past trends were studied and probable future evolution analyzed. Four general criteria were applied to group selection: In the first place, separate and explicit consideration was given those products that are imported in great quantities: for example. corn, lumber, rice, etc. In other instances individual treatment

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was given products whose importation is expected to experience offtrend changes. Structural steel bars would be an example of im ports falling within the latter classification. In this case, the estab lishment of a local plant which recently began manufacture of these bars is likely to affect the past trend in imports. Another example is the importation of sacks or bags which has materially declined as a result of the adoption of the system of shipping sugar in bulk. A third criterion is the type of installations required. Here, for ex ample, imports of corn, animal feed and wheat flour were analyzed jointly since the three types of products can all be moved through the installations that eventually will be provided for the flour mill currently under construction. The fourth classification refers to the end-use of the products themselves: i. e., whether the commodities represent investment or consumption goods. When applying this crite rion to imports of metallurgical products and their manufactures, for example, separate consideration was given to water pipes, freezers, and television sets. Projected Data

Dry cargo import tonnage increased at the annual rate of 58,000 tons on an average between 1950 and 1955, representing a yearly rate of increase of 4%. During the same period gross na tional product at constant prices expanded at the rate of 5% per year. This rate is substantial, but less than that corresponding in Puerto Rico to a longer period (1947-1955), and less than the six and some odd percent that in all likelihood will be achieved in future. This is not an appropriate moment to go into details. How ever, if I were to undertake to point out the principal causes of the diminished economic growth experienced in the five-year period 1950-1955, I would cite the reduction in federal government ex penditures in Puerto Rico, the drop in sugar cane production after the high level achieved in 1952, and finally the fact that in the last year of the period (fiscal 1954-55) Puerto Rico’s industrial production was still feeling the typically delayed-action impact of the economic recession in the United States in 1954. Imports naturally followed a parallel movement; hence they did not expand very rapidly during the period under study. In subsequent years, however (1955-56 and 1956-57) the average rate of increase in dry freight imports amounted to 10% annually, or 168,000 tons yearly in absolute terms. In accordance with the projections, the average increase up until 1965 will amount to some 88,000 tons, or 4%, annually. The rate of increase, then, is equal to that corresponding to the 19501955 period, and very substantially lower than the rate registered between 1955 and 1957. In other words, by 1965 dry cargo imports are expected to expand by 700,000 tons. This means that Puerto Rico must make

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preparations to receive 35% more dry cargo in 1965 than was the case last year. 1975 projections set the total volume of dry freight at 6 million tons. Since the estimating procedure involved separate projections for the different groups, it would be necessary to analyze each of these projections in order to get a real picture of the significance of the total import figure. In other words, if it should develop that the total figure is not in line with past trends, the validity of the projection could not be questioned ipso ¡acto. I repeat that it would be necessary to investigate each of the estimates which, when added together, make up the total figure. The following table shows certain comparative data which should be of interest: : Projections : Actual Data Per i o d s 1955-57 1957-65 1965-75 1950 -55 Dry Cargo Imports Average annual increase 580 (000 tons) Percent of annual in 4% crease Percent of annual in crease in gross pro 5% duct

163

104

10%

A cursory glance al the foregoing table would give one the impression that dry cargo import projections are quite conservative. General economic development projections point to an annual rate of increase in gross product amounting to slightly more than 6%, which is the rate registered between 1917 and 1955. On the other hand, the projections on imports allow for an average rate of in crease of only 4% up to 1965 and 3% thereafter. Nevertheless, this rate of increase in imports appears to be reasonable due to the fact that when total production increases, the production of services ex pands more rapidly than that of tangible goods. Changes in the Breakdown of Imports

The Puerto Rican family diet almost always includes rice, kid ney beans, and codfish. All three products are imported almost in their entirety and in very sizeable amounts: for example, in fiscal 1956-57, the three together accounted for 196,000 tons of imports. This means that the average daily consumption of these imported foodstuffs on the part of Puerto Rican families amounts to 2-1/4 pounds. At an average price of 14 cents per pound, 32 cents daily are sufficient to obtain 2-1/4 pounds of this combination of food

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for the family. The volume of importation of the three items amounts to more than total exports from Puerto Kico (exclusive of sugar, cement, syrups and scrap iron). The latter in 1956-57 amounted to only approximately 160,000 tons. In terms of value, of course, the picture is completely different: The value of the 198,000 tons of rice, kidney beans and codfish amounted to some 331 million, whereas exports from Puerto Rico exclusive of sugar, cement, syrups and scrap iron were valued at $216 million, or seven times as much. Prospects are that the consumption of the three above men tioned products will tend to decline. The reason is simple: When income increases, families are likely to replace these foodstuffs with others that are richer in protein content, such as meat, milk and eggs. It is expected that the Puerto Rican population will re main more or less stable in the immediate future. Consequently increased income will probably be accompanied by a drop in absolute terms in consumption of the three foodstuffs and possibly in others that are similar in nature. The foregoing assumption is reflected in the projections that for 1975 forecast only 146,00 tons in im ports of rice, kidney beans and codfish, compared with the 198,000 tons imported in fiscal 1956-57. How does it happen, then, that in the light of these admitted downward trends, a substan tial increase in total imports is predicted? Criticism of projection results has for the most part followed this line of reasoning. The following table provides the explanation. You will observe there the substantial increase in imports of other items, such as meat and canned vegetables. The figures also attest to the phenom enon of the substitution of imported foodstuffs by others that have a higher value but are also imported.

Variation in Tonnage of Certain Imports (Thousands of short tons) I.

II.

Rice, kidney beans and codfish Rice Kidney beans and codfish Meat, canned vegetables, and canned fruit juices Meat Canned vegetables Canned fruit juices

1949-50

1956-57

Increase

202.3 158.0

198.0 156.3

— 4.3 — 1.7

44.3

41.7

— 2.6

75.3 38.0 28.2 9.1

119.2 50.5 45.7 23.0

43.9 12.5 17.5 13.9 However, there are other, more powerful reasons. It has become almost axiomatic that when income increases, the consumption of dur-

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able goods expands in greater proportion than other commodities. Durable goods, at least in Puerto Rico, and probably in many coun tries in process of economic development, are supplied in large measure from imports. Eloquent testimony to this fact is had in the movement of imported motor vehicles and parts, which tripled in weight terms between 1949-50 and 1956-57. However, the most important factor for consideration is the importation of finished and intermediate investment goods. Invest ment in economically underdeveloped countries also has a high im port content, after the fashion of durable goods consumption. The necessary machinery and equipment are supplied almost entirely by importation from industrialized countries: in Puerto Rico’s case, principally from the United States. Furthermore, investments in Puerto Rico have expanded considerably in recent years. Prior to 1955 the investment in fixed capital customarily represented less than 15% of the country’s total gross product. In the last two years, however, that coefficient rose to 21%, and this is the coef ficient level that Puerto Rico will be obliged to maintain if we are to achieve the growth goal we have set ourselves. Productivity in Puerto Rico is growing apace, and a large part of these investments arc labor-saving in nature. Hence investment is required not only for purposes of directly increasing production or productive cap acity hut also to substitute for labor and, consequently, increase pro ductivity even though such investment may not necessarily result in greater production. This explains in part why the capital-output ratio has been diminishing systematically in recent years. We conclude, then, that investment in Puerto Rico will con tinue to grow at a rapid rate and will involve heavy imports of machinery and equipment. Between fiscal 1949-50 and 1956-57 imported “machinery and vehicles” increased by some 64,000 tons, or a 240% increment. However, in addition to machinery and equipment, the invest ment picture includes new buildings, which also exert strong upward pressures on imports. Even though many construction materials are produced locally — cement, for example — many more must be supplied from abroad, particularly in the metal products line. This is reflected in a substantial increase in imports of “metals and metal manufactures” (excluding machinery and vehicles) which rose be tween 1949-50 and 1956-57 by 108,000 tons (i.e., from 93,000 tons in total imports of these items in 1949-50 to 201,000 in 1956-57). Even though some of these products -will eventually be produced in Puerto Rico, as is already the case with respect to iron bars, imports will unquestionably continue to show a sharply upward trend that will parallel growth in investment.

MARITIME PORT DEVELOPMENT PLAN

The result of all these changes is a substantial change in the breakdown of imports. The following table will clearly illustrate this point:

Total 1. Foodstuffs 2. Metals and metal manufactures 3. Others

Dry Cargo Imports Percent Breakdown 1949-50 1956-57 100.0 100.0 40.0 49.0 10.5 40.5

15.0 45.0

Annual Rate oj Increase 1950-57 6% 3%

12% 11%

This trend is expected to continue in future. Thus, by 1975 the proportion of imports taken up in foodstuffs of either animal or vegetable origin will have dropped to 30%, compared to the 40% figure corresponding to 1949-5Ó. For their part, imports of metals and metal manufactures will more than likely continue their upward trend, to reach an estimated 23% of total imports by 1975. In the measure that demand for certain individual products increases, their production in Puerto Rico may become economical ly feasible. This has already occurred in the case of doors, aluminum window frames, and structural steel bars and could very well hap pen again with respect to other metal products qualifying as in termediate-type construction materials. The foregoing hypothesis is responsible for the fact that projections allow' for a lower rate of growth than has been the case in the past. Methodology. When estimating future imports, previouslyprepared economic development projections have constituted the principal basis for calculation. The choice of indicator of future growth — depending on the product or groups of products involved — was made between total gross product, total investment, or anticipated consumption expenditures. In other cases per capita demand for a given product was analyzed. Whenever circumstances so dictated, present or anticipated local production was taken into account. Generally speaking, past trends were permited to weigh heavily in the calculations. Certain of the economic indicators used in gauging given imports are outlined below: 1.

Cross National Product

The rale of growth in gross product corresponding to each fiveyear period up to 1975 is shown in the book on “Economic De velopment Projections for Puerto Rico.” A similar rate was ap plied to the following imports:

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Imports of paper and paper products Here the estimated production of the factory currently under construction to manufacture paper from sugar cane bagasse was subtracted from the figures obtained on the basis outlined in the foregoing paragraph. 66,600 tons of paper and derivatives came into the country in 1956-57, representing an increase of more than 200% in the last decade. b. Detergents and other miscellaneous chemical products It would appear quite logical to apply to this assorted group of products a rate of growth equal to that anticipated for the coun try’s gross product. c. Inedible products of animal origin This import item amounted to 8,100 tons in 1956-57, compared to 5,400 tons in 1949-50. 2. Investments in Machinery and Equipment This projection was also included in the statistical volume mentioned earlier. The same percentage increment was applied to the following individual or group imports: (a) electrical machinery, (Imports rose from 10,000 tons in 1919-50 to 22,000 tons in 1956-57). (b) unspecified machinery, tools and parts, (c) tex tile machinery and parts, (dl agricultural machinery, (e) trucks and buses, and (f) miscellaneous group within the machinery and vehicle classification. 3. Investment in Housing Imports correlated with housing investment comprised: (a) lumber and derivatives, (b) clay or tile products, and (c) paints. 4. Projections Prepared by Other Agencies In many cases the desired estimates were requested of certain government agencies —■ in particular, the Economic Development Administration — since the products involved were those whose importation was susceptible of modification as a result of local manu facturing projects. For example, estimates on the importation of corn, wheat flour and feed, corn flour and vegetable oils were prepared by the Economic Development Administration which as you know is in charge of the industrialization program. Imports of the aforementioned products hinge on developments with respect to the slaughterhouse, flour mill, and soybean oil meal plant which are currently in process of establishment. 5. Projections Based on Trends In many cases the projection method used was merely to extend into the future trends registered in recent years. 6. Special Projections In some instances an endeavor was made to obtain a more precise picture on the probable evolution of certain imports. For

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example, per capita consumption of rice was analyzed when estimat ing future imports of this product. In 1939-40 per capita imports of rice amounted to 140 lbs. This figure dropped to 137 lbs. for the 1956-57 fiscal year, and may be considered to represent per capita consumption since local production is negligible. hat is the outlook? The mere fact of this slight decline is eloquent, and supports the conclusion that in the measure that income increases, rice consumption is reduced. The projection was based on an ex tension of this trend and indicated that per capita consumption will have dropped to 108 lbs. by the year 1975. When this figure is compared to that corresponding to the United States, it is still ex tremely high. However, here is a case where the consumption habit itself, even given equal incomes, is different. On the other hand, the 108-lb. figure is somewhat less than that deduced from a rather cursory survey among families whose average income amounts cur rently to some $6,000, which is expected to be the average level of family income in Puerto Rico by 1975. A similar special procedure was followed in estimating kidney bean imports. Imports of this product have remained constant since 1910 at the level of 23 lbs. per capita, whereas 16 lbs. per capita are anticipated by 1975. Codfish consumption dropped from some 16 lbs. per capita in 1910 to 14 lbs. in 1957. The figure projected for 1975 is 10 lbs. 1 he consumption of potatoes is expected to follow an opposite trend. 3 his phenomenon is of particular interest since potatoes are usually cited in temperate countries as representing a typically inferior good — that is, an item whose consumption decreases in the measure that income increases. In Puerto Rico, however, the contrary is true. Present consumption is on the order of some -13 lbs. per inhabitant; and by 1975 this figure is expected to increase to 58 lbs. A similar procedure was employed in estimating imports of flour and automobiles. Imports of soap were gauged to follow anticipated percentage changes in the total population, and the same method was followed in the case of salt. These last-mentioned figures will almost certainly have to be revised. In 1956-67 salt was imported at the rate of some 12.000 tons, and this import level was judged to remain constant. However, a project for local production of salt appears to be in prospect, which would drastically reduce the need for imports. Projection of Dry Cargo Export Tonnage.

Unlike imports, the bulk of our export tonnage is made up of three or four products, the principal one. of course, being sugar. In 1956-57, 1-1/2 million tons of dry cargo were exported (excluding exports of syrups and petroleum derivatives). Of that amount.

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sugar accounted for 957,000 tons. It is further estimated that another 344,000 tons corresponded to cement, and 40,000 more, scrap iron. There is a residual, then, of only 160,000 tons represent ing all remaining exports. 64,000 tons out of the last-mentioned group were composed of beverages and foodstuffs of vegetable origin (principally rum, coconuts, pineapple, limes, malt and other agri cultural products) leaving only 96,000 tons in other export items. Nonetheless, this group, which is made up of manufactured goods, ac counts for a value of some $202 million, or 45% of the total value of all exports. In other words, only 4% of total exports in terms of quantity or weight produce 45% of the total value of exports.

Breakdown of Exports by Quantity and Value Fiscal year 1956-57

Total exports Group A1 Group B2

Amount (thousands of tons) 2,400 2,304 96

Value (millions of dollars)

Value per ton (dollars)

100 96 4

446.3 244.3 202.0

100 54.7 45.3

186 106 2,101

Group A includes: (a) tanker cargo (gasoline and syrups), (b) sugar, (c) cement, (cl) scrap iron, and (c) beverages and foodstuffs of vegetable origin. 2 Group Ji comprises remaining exports, made up almost exclusively of products from Puerto Rico’s new factories.

These figures point up one of the characteristics of manufactur ing for export: the high value of the products in comparison with their weight. This is to be expected, of course, given the distance from the market. With rare exceptions, the proportion of transpor tation costs in Puerto Rico as compared to the value of the product tends to be relatively small. Take the year 1956-57, for example: If the 96.000 tons mentioned above were to have been shipped by air to New York at a rale of 10 cents per lb. — that is, the actual rate charged on shipments of more than 10,000 lbs. of gar ment manufactures — transportation costs would not have been higher on the average than 10% of the value of the products. This also explains why distance from the market does not constitute a major obstacle for the types of export industries being established in Puerto Rico under the industrialization program. In fact, a considerable portion of finished products as well as certain raw materials are at present shipped by air. A study recently conducted on this subject led to the conclusion that of 42 garment industries investigated. 18 send their entire production to market by air, and 11 more alternate in their use of maritime and air transport.

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As a result of the industrialization program the cargo volume made up of manufactures has undergone a rapid rate of increase. In 1949-50 the tonnage comparable to the 96.000 tons discussed above amounted to only some 36,000. The major increase came from the exportation of textile products which climbed from 5.300 tons in 19-49-50 to 20,100 tons in 1956-57. In accordance with projec tions of net income to be derived from the textile and clothing in dustry (which were prepared in connection with the general eco nomic development projections), these exports will be doubled by 1960 and are expected to reach 118,000 tons by 1975. Another of the export industries undergoing heavy growth is that of light machinery. Export tonnage of metals and metal manu factures (excluding scrap iron) has risen from practically nothing to 9.000 tons. The projection applies to this tonnage a rate of growth similar to that reflected in the projections of net income to be derived from the “metals and by-products” industry. This basical ly represents an extension of the trend, and exports in this field by 1975 are estimated at some 71,000 tons. As may be inferred from the two above examples, the bases for industrial export projections lie in the projections previously formulated as a part of the general forecasts on economic develop ment. It has been assumed that sugar exports will fluctuate around 1.190,000 tons. Added to the 110,000 tons which represented local consumption, this figure points to a total production of 1,300,000 anticipated for Puerto Rico. In the case of cement exports, a con stant figure was arbitrarily chosen, represnling actual exports cor responding to the fiscal year 1956-57. Since these shipments go out through special port installations, any error in the estimate is ir relevant from the standpoint of the port program. Projections of “beverages and foodstuffs of vegetable origin” for export reflect a very substantial increase al long term in canned pineapple exports which is likely to result from the recent establishment of a modern canning plant. In summary, an annual increase of some 45.000 tons is fore seen for dry export cargo. From 1,400.000 tons of dry cargo ex ports in 1956-57, the volume should increase to approximately 1,900.000 by 1965, and to 2,400,000 by 1975. The over-all pattern of total dry cargo movement, then, can be summed up briefly as follows: In fiscal 1919-50 total dry cargo amounted to 2.6 million short tons. By 1956-57 it had risen to 3.5 million tons, and in keeping with the foregoing projections this cargo should continue to expand to where it will reach the 4.6million-ton mark in 1965 and 6.0 million tons ten years thereafter. However, the question now arises: Are these figures on total dry cargo sufficiently revealing to enable the formulation of an adequate port program?

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Types of Cargo as Related to Shipping Methods

When the volume of cargo of a specific product reaches a cer tain level, there is almost always a tendency to utilize special bulkcargo-handling installations wherever feasible. Resultant economies are the reason for this general practice. In Puerto Rico cement, for example, normally moves out in bulk, and the same has been true of the handling of imported fertilizers. The system was recently instituted in the case of raw sugar exports. Scarcely two years ago (1955-56), some 667,000 tons of raw sugar was still exported in sacks; in the current year all raw sugar will be exported in bulk through four port installations located at different points on the is land. Further, at the present time the importation of wheat, corn and animal feed is expected to be effected shortly in bulk. The plant that will utilize these products is already in an advanced stage of construction. Il will overlook San Juan bay and will require an estimated outlay of S5 million. The important point here, insofar as our discussion is concerned, is that by 1961-62 a very small amount, if any, of these products will be imported through our present ports and landing places. Compare this circumstance with the fact that approximately 214,000 tons of wheat flour, corn and animal feed were unloaded through the above mentioned facilities in fiscal 1956-57. Plans arc also in prospect for the eventual re ceipt in bulk of some 60,000 tons of rice. As is customary, the information corresponding to this type of projection was obtained through the cooperation of the Economic Development Administration which, as we have said, is the agency in charge of the industrialization program. The outlook, then, is that by 1961-62 1.100,000 tons more than in 1956-57 will be moved in bulk through special port installations.

What arc the implications of this increase in special careo? I would say two, fundamentally: The first is that it is obviously imperative to plan industrial ports or special port installations. As a matter of fact, the Port Authority and the Economic Development Administration have already begun to draw up plans of this type. The second implication has a direct bearing on the current maritime ports program that I have undertaken to explain in this lecture: The transfer of cargo to special ports and installations re duces the movement of freight through present port and landin" facilities. Thus, even though by 1965 the total volume of dry cargo will have increased, as mentioned earlier, by some 1.1 million tons. the volume of bulk freight will expand by something more than that amount; therefore, it is not anticipated that any more dry freight will have to move through present port installations in 1965 than was the case in 1956-57.

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The foregoing underscores the need to extend the analysis of cargo projections to a type-of-cargo breakdown. In the following summary table estimates made for Puerto Rico as a whole are in dicated : Volume oj Dry Freight Exports and Imports in Puerto Rico — by Fiscal Year (millions of short tons)

Actual Figures 1949-50 1956-57

Total movement 2.6 Imports 1.3 Exports 1.3 Less: Bulk handling 0.4 Equal to: Dry cargo moved through present port facilities 2.3

Projections 1961-65 1971-75

3.5 2.0 1.5 1.0

4.6 2.7 1.9 2.2

6.1 3.7 2.1 2.3

2.5

2.4

3.8

Projections Corresponding to a Specific Port-. The Case oj the Port oj San Juan As I remarked earlier, planning ordinarily involves the problem of having to plan specific projects for specific places. At the same time, I pointed out that the only way of gaining an idea of certain local economic variables is to study first the over-all figures since these are the ones that lend themselves to determination, given a known economic growth. Up to this point, then, the projections I have been discussing have referred to Puerto Rico as a whole. Now the appropriate moment has arrived for determining what part of those projections are applicable to San Juan. The general procedure consisted in determining first what per centage of each of the groups of articles comprising the import and export breakdown is imported and exported through the port of San Juan. For some products, such as sugar, absolute figures were used. In Puerto Rico this procedure is quite painstaking because the principal source of information — foreign trade statistics of the Department of Commerce —■ do not generally show a breakdown by ports. However, other statistics fortunately are available that do give the by-port distribution. These are compiled by the Army Engineering Corps and are believed to be representative of the per centage breakdown of the various commodities by ports. In this way, figures corresponding to Puerto Rico as a whole were based on Department of Commerce statistics which are considered to be the most complete and reliable, and the percentage corresponding to San Juan was obtained from the statistics compiled by the En gineering Corps.

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These percentages were kept constant in the projection. That is to say, the hypothesis was that the proportion of each specific product moved through the port of San Juan would not vary. The reasoning here was that in view of the decentralization policy chances are that the relative growth of the area served by the Port of San Juan will not differ greatly from that corresponding to the other two ports in combination. The following table presents a summary of the estimates cor responding to the Port of San Juan: Dry Cargo Export and Import Volume Moved Through the Port of San Juan —■ By Fiscal Years (millions of short tons}

Actual Figures 1956-57 Total dry cargo 2.0 Imports 1.5 Exports .5 Less: Bulk handling, total .3 — Rice Corn, wheat and — animal feed Fertilizers .2 Sugar .04 Cement .01 Scrap iron .01 Equal to: Dry freight moved through present port facilities 1.7

1961-65

Projections 1969-70 1974-75

2.8 2.0 .7 1.0 .06

3.3 2.1 .9 1.0 .06

4.0 2.8 1.1 1.1 .06

.3 .2 .4 .01 .02

.4 .2 .4 .01 .02

1.8

2.2

2.9

These projections completed the first stage of preparation of the port development plan commended to the Division of Economics of the Planning Board.

ECONOMIC PLANNING SEMINAR October 27 — November 28, 1958

EDUCATION IN PUERTO RICO AS RELATED TO ITS ECONOMIC DEVELOPMENT By Beresford Hayward

Advisor Department of Education

Lecture prepared for the Economic Planning Seminar held under ’he auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

EDUCATION IN PUERTO RICO AS RELATED TO

ITS ECONOMIC DEVELOPMENT • By Beresford Hayward

Advisor Department of Education

Our topic for discussion this morning is the problem of educa tional development in its past and present relationship with the de velopment of the Puerto Rican economy. Here data can be presented to demonstrate that education has progressed in Puerto Rico along lines which, if not dictated by the demands of the local economy. most certainly have responded to that economy with a high degree of consistency. Puerto Rico’s economic fortunes, however, ever since the early organization dating back to Spanish colonial times. have been wholly dependent on the political situation of the country. Bearing this circumstance in mind, the next step obviously is to investigate the background of the most recent period in our history, which culminated in the advent of the Commonwealth. This politi cal development did in fact bring with it a conscious economic policy which has encouraged, planned and managed economic ex pansion as a fundamental political task of the Puerto Rican people. Given the fact that public education is considered as one of the aspects of economic expansion, it was to be expected that the above structure would lead to a conscientious endeavor to make educational institutions and policies conform to their predestined role in economic development. Thus we find that in the last ten years educational institutions have not only reflected the circum stances of the economic environment within which they function. but have also formed a part of the conscious planning process to which this government is committed. By recognizing this political element in the economic develop ment of Puerto Rico we have already taken the first step toward finding out whether education can be realistically considered to be directly connected with the economy. In this respect, the first and obvious mission of education is to prepare the people to play their role and do their job within the economic life of the country. And the other functions of education? And the preservation of culture and creative stimulus to that culture? And the develop ment of social responsibility and public morals? And training for local and international citizenship? Which of these functions should

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be given priority? It seems to me that the generally accepted at titude in this matter is that although technically planning and scheduling of public education with a view to fostering economic development is of maximum importance, these other functions must form an inseparable part of the process if real success is to be achieved. The strength of these and other “non-economic” aspects of education will contribute a great deal toward the vigor of the economy itself, since they create the social and political environ ment in which that economy is destined to function. The development of the non-economic functions of education is also closely linked to the pursuit of social and cultural objectives — to the type of society that the people want. All of us are aware of instances in which social and cultural trends in a community or nation serve to work against, and retard, economic expansion. However, we find that here in Puerto Rico the opposite is the case: economic expansion takes hold of things social and cultural and carries them with it. In our case, in response to economic de velopment, social and cultural changes are rapidly heading toward goals that are difficult to foresee. To avoid a situation in which the people of Puerto Rico are merely at the service of their economy, a growing awareness of social and cultural objectives must be en couraged in order to assure that economic expansion will serve those objectives. The educational system has a clear responsibility in connec tion with this endeavor. Having made this statement, I have automatically transported you to the very portals of our school plan ning problems where instead of knowing the answers we arc faced with imperative questions. This being the case, we are better advised to return to the discussion of public (‘ducation as it has developed and should be developed in conjunction with the economy. Unquestionably, during the fifty years prior to the “all-hands-ondeck” operation, important foundations were gradually laid on which this program could be conceived and prosper. This is particularly true in the case of education. An extremely backward school system which in 1899 could accommodate only 29.172 pupils (or 9% of the school-age population) had expanded and been strengthened year by year to a point where total public school enrollment in 1947 amounted to 366,931. During this period in which the population of Puerto Rico had grown from something under a million inhabit ants to more than two million, the capacity of the school system was expanded twelve times over. In 1899 426 rural areas on the island had no school at all, a situation that was corrected beginning in 1920. The University of Puerto Rico was organized for purposes of initiating teacher training during the first year of the present century; and a school system that had started out with 525 teachers could count on the services of 9.000 by 1948.

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Between the years 1900 and 1916, the increase in the budget set aside for public education appears to have reflected not only of ficial policy but the gradual development of the economy. Although the budget expanded from $280 thousand in 1899 to $6.4 million in 1940, the percentage of tax revenues earmarked for public schools was notably constant. In 1900 25.3% of total government income from taxes was devoted to the school system: and although in succeeding years as much as 40% of tax revenues were channeled to education, by 1940 the percentage relationship had dropped back to 24.8%. For 1946 the public education budget amounted to $19.6 million, or 25.7% of tax income. Expenditures per student rose from $9.86 in 1899 to $22.70 in ]940 and $53.43 in 1916. Thus we see that total amounts available for public education in general paralleled the expansion of the island economy, and the growth in per capita income and tax collections.

Puerto Rican educational agencies also were highly successful in other respects which revealed the island’s growing economic capacity. In fiscal 1930-31, the General Board of Education re ported that: “The problem of extending educational services hav ing a like degree of efficiency to all children on the island is perhaps impossible to solve under present economic and social conditions.” Eleven years later (1941-42) the Department of Public Education had adopted an “educational philosophy” for Puerto Rico which affirmed in part: “Education should not be the privilege of a selected group. On the contrary, it belongs to everyone, not just up to an arbitrarily-established age limit but until such time as the student develops the greatest possible capacity and willingness to contribute to the betterment of society.” Educators had come around to meeting the challenge of mass education. Moreover, prior to 1930 the expansion of the school system had been tailored to the basic goals of “Americanization” and the teaching of the English language, together with the traditional at tention paid to reading and writing. However, with the advent of a sizeable group of Puerto Rican educators who had assimilated democratic and progressive ideas on education at United States universities, a critical attitude began to build up and became evident around the year 1930. The idea that Puerto Rican public educa tion should be adapted to the specific needs of the country gained increasing currency. This led to an intellectual struggle regarding the direction that should be followed by education on the island — a struggle that in a certain sense derived from the political awakening that culminated in the Commonwealth status. From the standpoint of educational progress, the important fact was that traditional standards in the matter of education were subjected to critical scrutiny, which eventually paved the way for the changes that the new economy would call for in succeeding years.

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The literacy rate in Puerto Rico (applicable to the popula tion in excess of 10 years of age) rose from 20% in 1899 to 75% in 1950. Hence, Puerto Rico’s major economic resource at present and perhaps at long term — the population — was not “underde veloped” at the time the Commonwealth began its all-out effort to build a strong economy. Notwithstanding this initial progress during the period in which the country was a United Stales territory, the Commonwealth government was faced with a tremendous educational task. As late as 1949 no less than 42% of the children of school age had not been enrolled. 60% of the students who were enrolled attended school only half a day (under the “double enrollment” arrange ment). The shortage of classrooms was particularly acute in rural areas where at least 1600 new classrooms were required to accom modate the children who could not continue their education because those areas offered no facilities at the time (1949) beyond the third-grade level. Even then, such classrooms woidd not have solved the “double enrollment’’ problem in the old school buildings that had already been condemned as unfit for occupancy. The generally accepted estimate was that the Department of Public Education needed to construct 10.000 new classrooms. The first objective that the government then in power obviously needed to strive toward consisted in expanding the school system as fast as possible in order to provide the capacity that would enable every child to obtain a basic education (i.e., up to the sixth grade). The declared goal (19521 was that at least 91% of all children from 6 to 12 years of age attend school. Revised estimates indicate that in 1958 we have reached the point at which at least 85% of the children between those ages go to school. Generally speaking, the solution of the double enrollment problem has had to await the prior resolution of the task of affording basic education for every child. Worthy of note (and perhaps characteristic of all modern ef forts to develop industrial economies in new areas) is the fact that the government undertook to expand the school system at the precise juncture when the dynamics of the new prosperity and progress in sanitary services were carrying the population increase in Puerto Rico to record levels. We should add here that the new popula tion was destined to become an increasingly changing population determined to find work in the new factories, and new opportunies in San Juan and other urban areas. All in all, economic development has made it possible for the educational system to expand on many fronts. Maintaining its traditional proportion of participation in tax revenues, the annual public school budget climbed from 819 million in 1947 to 830.1 million (26.5%) in 1949-50. and 855.8 million in 1957-58 (26.9%).

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These funds have financed classroom construction to a point where available schoolrooms have increased from less than 6.000 to more than 10,000. Recognizing the fact that it is not feasible to provide classrooms in many far-distant rural zones, school bus services were expanded to where they currently accommodate 20,000 students as a minimum, at a cost in fiscal 1958-59 of approximately$550,000. (This program has been made possible, of course, thanks to the improvement in Puerto Rico’s highway network.) New posts for teachers have been created at approx imately the same rate that new classrooms have been provided: The combined teaching staff for Puerto Rican schools amounted to 12,480 during the fiscal year 1958-59. Since the educational program will gather into the schools the children of many poor families, the school system is committed to a broad program of social services. In 1958-59 lunch will be served to 46% of the student body to insure that the youngsters will get the food they need for growth and instruction Further more, 100,000 pairs of shoes will be distributed, as well as money for clothing, to 12,000 scholarship students. The major purpose of this program is to create among children from families who are less privileged economically the personal attitudes and feelings that will contribute to their normal development in school. This is perhaps only the beginning of a broad undertaking aimed at achiev ing equality of educational opportunity and discovering and encouraging talent throughout all sectors of society. By 1957 the initial goal of expanding the school system to a point where it could provide basic education for every child had been reinforced by the development and firm entrenchment of satisfactory student body retention indexes. Proposed by the Com mittee on Human Resources, these indices have been accepted as the basis for educational planning in connection with the labor force projection for 1975. The student body retention indexes by grade level and by dates may be set up in the form of goals, and progress toward those goals can be accurately ascertained year after year. The most im portant retention objective proposed by the Committee on Human Resources (and adopted as government policy) is to achieve an 85% retention index “by 1960.” More explicitly stated, this would mean an 85% retention index corresponding to students from the first to sixth grades when they pass from the 1959-60 school year to that of 1960-61. The only way to attain this index is to increase the retention rate from grades 5 to 6 by a total of 5% for each grade during the three school years subsequent to 1957-58. It is true that in absolute terms the amount of children enrolled in Puerto Rican schools has increased to a noteworthy extent, having more or less doubled since 1910. It is also true that the retention

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index improved in general during the past ten years. However, there has never been an equally rapid rate of retention from one grade to the next. However, enrollment figures for October, 1958, indicate that the necessary rate of progress toward this three-year goal was achieved in the current year. To reach the prescribed retention goals within a year follow ing the date originally set would appear to be a feasible objective for the school system at the present time. The growing rate of student retention which has been in evidence for some years back may be owing in large part to the continuous physical expansion of the system, whereas the decreasing number of children leaving school (as attested to by our most recent study) indicates that the improved social services offered students is destined to play an in creasingly important role in their effective retention. The Adult Education Program has as its principal mission that of filling the vacancies in the ranks of trained labor — vacancies that will always exist despite present expansion in child educa tion. From an enrollment of 6,903 in 19'19-50, this program has been augmented to include 51,769 adult students in 1957-58, 38,895 of whom enrolled in the first to third grades. The demand for labor power will determine the advisability of paying greater attention to adult courses in the higher grades. The large-scale expansion of the University of Puerto Kico has followed the general outlines of the labor force program. Even so, the need to train teachers has not been expressed and scheduled explicity; and it is imperative that this be done. The need for greater expansion in university educational facilities may be deduced from the following figures. In 1922, less than 1% of the children who enrolled in the first grade finished high school (or a total of 12 years of schooling). In 1947, 7% completed their high school education; and by 1957 this figure had risen to 15.5%. By 1970 32% of the students making up the presently heavy enroll ment in the first grade will have graduated from high school. This, by deduction, will represent a class of some 22.000 new college students. With respect to elementary and secondary school, the effort aimed at retaining an ever-greater number of students in the class rooms for an ever-increasing period of time obviously implies the purpose of achieving higher levels of education for the children. However, the time that they remain in school is only one measure — and the most imperfect of all — of the educational levels at tained. The degree of education actually achieved is the point at issue. In the final analysis, educational goals for the population should be expressed in terms of what is learned, independent of the amount of time required to learn it: In short: Á retention program is completely senseless if attention is not paid to the quality of education being imparted to the retained students.

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It is precisely when we have begun to reach our quantitative student-retention goals that we are called on to face the problem of a serious decline in the quality of the results obtained by the school system. This could tend to nullify a great part of our pro gress toward preparing the trained man power necessary to the achievement of our economic goals. This, of course, is hardly sur prising. It has happened in every case in which the educational regime in any country has been expanded rapidly from a highly restrictive system implying student selection to another that throws open the doors to virtually everyone. The rapid development of the Puerto Rican economy, which paves the rvay for the expansion of mass education, also creates serious educational problems. Widespread population changes, ac companied by cultural and social dislocation, create difficult prob lems for the schools. Opportunities of finding employment else where in the expanding economy attract teachers away from their profession, and therefore constitute a drain on the educational system. Basic educational institutions in Puerto Rico currently are fac ing the grave problems that have grown out, in part at least, ot their own huge success on the expansion front. The following are the most critical of these institutional problems: 1. The increasing percentage of inadequately-trained teachers. In 1957-58 55% of the teaching staff in secondary schools and 20% of that correponding to elementary schools could be so clas sified, reflecting for the most part the rapid teacher turnover in an economy offering them the alternative of better-paid jobs. 2. School instruction in half the normally-allotted time. Twothirds of the elementary school students are “double enrolled." This situation is particularly serious in the case of the 100.000 children whose teachers have to look to the needs of 60 to 100 students per day. 3. The need to prepare complete and detailed curricula, and teaching guides and materials, in order to cope with the new situa tion of Puerto Rican schools and elevate educational standards. As the basis for combatting these problems it will be necessary to develop a thorough definition of the goals to be reached in terms of student retention in the schools, given a minimum of institution al facilities. This will have to take into account the number of hours of instruction, number of students per teacher, cultural level of the teacher, type of curriculum and books supplied, etc. In the final part of this discussion I should like to describe a few guidelines that would enable a given program to satisfy our country’s educational requirements. As already pointed out. Puerto Rico’s educational development during the past eight years has placed great emphasis on expan

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sion. We have just about reached the halfway mark with respect to the physical aspects of this expansion. Up to now growth has concentrated in large part on elementary schools, many of which have gone up in rural regions. Since we have reached the peak in elementary school population, and since the movement of the population is in the direction of urban areas, more attention must be paid to the program for secondary and urban schools. Secon dary schools should be diversified a great deal more than the present division of these institutions into academic and vocational groups. We should make note here of the increasing enrollment in private high schools, which amounts to approximately 17% of the total. Here the Public Education Department faces the need to plan schools in such way that all children will be offered the legal opportunity of attending public schools, at the same time protecting the right of private schools to go ahead with their programs. Training the necessary number and types of teachers, includ ing practice teaching, is perhaps the key to the future educational program. Unprecedented numbers of intermediate and high-school students will fill the classrooms during the next six years, and it is precisely in the case of these schools that the teacher training program is the farthest in arrears. Vie should establish a program to indicate the specific need for teachers of different subjects. We also have to evaluate the importance of the alternative demand for the services of those teachers on the part of activities outside the school system, and we must create the necessary conditions and incentives to obtain — and retain — the required number of welltrained teachers for our school system. Special efforts must be pul forth to keep teachers in their jobs. This complex economic problem calls for thorough investiga tion in Puerto Rico. However, as far as we have been able to determine to date, increased remuneration based on the particular functions of the teacher, better working conditions, and other im portant allied measures contribute to the solution of these problems. The development of curricula and the organization of the work of the teacher should be subject to thorough effort and experimenta tion, looking toward the most efficient use possible of the relative ly scarce staff of highly-trained teachers, and with the further aim in mind of bringing the latest technological and organization ad vances to bear. Since a decline in elementary school enrollment is forecast from the current year on. and high school enrollment is also expected to decrease by the middle of the next decade, the problems of double enrollment and overlapping demand on the same school facilities must be met by means of the well-planned utilization of more teach ers, equipment and programs, taking care not to construct an ex cessive number of permanent school structures. The program of

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student transportation to and from school should be intensified as a means of making the most efficient use of existing classrooms. The nature of the problems arising from school location is illustrated by the fact that new school establishments tend toward more complete units occupying space in urbanized and built-up zones. This calls for greater expenditures for land, as well as more detailed localization studies. The relationship existing between educational development in Puerto Rico and similar problems in the United States is worthy of special consideration. It must be pointed out that we cannot permit ourselves to servilely copy United States methods, or can we subscribe to the continental educational philosophy and practices. The respective situations are simply too different. This can be illustrated by men tion of the fact that together with the increasing efforts made in the United Stales to raise scholastic standards, the school author ities in that country arc testing certain methods designed to permit the use of fewer teachers (48 students per teacher instead of the present average there of 32 per teacher). This is the problem that U. S. communities expect to have to face in the next ten to fifteen years. In Puerto Rico we have already reached that point: Our current student-teacher ratio is 47 pupils per teacher (55 in the elementary schools). We therefore cannot follow after the United States, but must outdistance the continent in seeking our own solu tions for our educational development problems. Mass education standards for application in Puerto Rico should be truly independent and peculiarly adapted to the changing con ditions of the Puerto Rican society and economy. To accomplish this we must remain alert to, and derive inspiration from, two ex traterritorial currents of thought and tradition: 1. U. S. skills and innovations with respect to organization, technology, and method in the sphere of school program planning. 2. The cultural and intellectual achievements arising from the best European and Latin American educational traditions.

ECONOMIC PLANNING SEMINAR October 27 — November 28, 1958

PUBLIC REVENUES: WAYS TO FORECAST AND INCREASE THEM By

The Hon. José Noguera Secretary of Finance

Lecture prepared for the Economic Planning Seminar held under the auspices of the International Cooperation Administration and the Department of State of the Commonwealth of Puerto Rico with the cooperation of the Planning Board and the University of Puerto Rico

PUBLIC REVENUES: WAYS TO FORECAST AND INCREASE THEM By The Hon. José Noguera Secretary of Finance I.

/ ntroduction

During the past three weeks this Seminar has taken up various aspects of planning in relation to the economic development pro grams of the Commonwealth government. The discussion has cen tered principally on the objectives of those programs and on the methods employed in their realization. The work unit beginning this week has to do with an activity intimately related to the ac complishment of all these programs that are so vital to economic development: how to obtain the necessary resources to finance them, and how to administer the expenditure of said resources. In this opening lecture of the work unit mentioned. I have been assigned the task of discussing two aspects of the Commonwealth Government’s fiscal administration. Although different, these as pects are interrelated. One of them is how government revenue forecasts are prepared. The other is how to increase the resources available to that government for program financing. Before taking up these two topics, it should be helpful to take a rapid glance at the pattern of revenue sources in Puerto Rico. in order to familiarize ourselves with the institutional structures that will enter into the discussion. To facilitate this task, let us refer to the first table of the sev eral distributed among you before today’s proceedings began. Table 1 lists the resources which the Commonwealth government has had available to devote to financing its programs of expenditures dur ing the fiscal years 1953 to 1958. As indicated in that table, gov ernment resources derive from two principal sources: current in come and borrowings. In his lecture which is also scheduled for this morning, Roberto Montalvo will explain to you all the per tinent facts with respect to obtaining resources through credit grants. I shall therefore limit my talk exclusively to current gov ernment revenues. I should clarify the fact that current income presented in Table I does not include all current revenues, but only those that go into

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what is known as the General Fund. This is the common fund used to defray the expenditures which to be operative require ap proval or annual review by the legislature. As provided by the legislative assembly itself, a number of expenditures in connection with fixed and long-term commitments of the government are not subject to this annual review. Among others, the latter group in cludes payments on amortization of principal and interests on the public debt, and Commonwealth contributions to certain public institutions such as the University of Puerto Rico. These disbursements are made from individual reserves known as Special Funds, which are supported by certain special taxes whose proceeds are channeled directly to those Funds. For example, the fund set aside for meeting principal and interest payments on the public debt is made up of a 0.56% (fifty-six one hundredths per cent) tax on the assessed value of taxable property. During the past five fiscal years the amount of Special Fund income has rep resented approximately 23% of total General Fund revenues. In view of the fact that Special Fund receipts are predestined for specific uses, I feel that they should be ignored for purposes of the present talk. Therefore, when I speak of current revenues here inafter, it should be understood that I am referring exclusively to General Fund receipts. When mention is made of total resources, I mean to imply all items of income with the exception of those corresponding to the Special Funds. As shown in the above mentioned table, only slightly more than 7% of the total resources available to the Commonwealth gov ernment in recent years have been furnished by loans, with the re maining 93% corresponding to current revenues. The latter can be broken down into two principal classifications, according to their source: either internal or external. Let us look first at revenues derived from internal sources. These come out of the pocket books of the residents of Puerto Rico, and have contributed more than 81% of total government resources during the past six years. Income from internal sources, in turn, lends itself to a twoway breakdown: tax and non-tax. Tax income takes up slightly more than 75% of the government’s total revenues. Excise taxes on the use or sale of given articles constitute the principal source of tax income. In terms of tax collections on these commodities, the most important ones are alcoholic beverages, cig arettes. gasoline, and automotive vehicles. Excise taxes ordinarily supply some 43% of the total of government revenues. Taxes on the income of individuals, corporations and associa tions make up another major tax source, which represents about 1/4 of the government’s total resources. The structure of our in come tax is virtually identical to that levied by the government of the United Slates. There is, however, one vital difference: Our

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law provides for lower effective tax rates than does the federal legisla tion in the case of corporations, and of individuals having an in come of up to approximately 820,000 yearly. The other taxes charged by the Puerto Rican government are much less important in terms of income productivity. These in clude the property tax, which supplies about 1% of the State’s total resources; license fees, which account for slightly more than 3%; and the inheritance and gift taxes which represent less than 1% of those resources. All these taxes are levied and collected by the Commonwealth government and are paid, with certain insignificant exceptions, by the residents of Puerto Rico. Puerto Rican residents also pay an other tax that our goverment does not levy: the customs duties charged on certain articles imported into Puerto Rico from abroad. These customs duties are collected by the government of the L nited States; however, under the provisions of the Federal Relations Law. they accrue to the Puerto Rican Treasury once administrative costs are deducted. Customs duties supply about 3% of the resources of the Commonwealth government. Non-tax revenues from internal sources furnish approximately 5% of total revenues. Of these items of income, the most impor tant derives from earnings from the Lottery. Other important revenues in the non-tax classification are school enrollment fees and fines and penalties imposed as a result of court decision. in combination, all the revenues from the internal sources men tioned account for about 81% of total public resources. General Fund receipts from externa] sources are derived from excise taxes imposed by the government of the United States on distilled liquor and tobacco products shipped to the U. S. from Puerto Rico. These taxes, which are equivalent to the taxes levied by that government on the internal consumption of the articles involved in the United States, are paid in the final analysis by the U. S. con sumer. However, as provided for in the Federal Relations Act, proceeds from the above excise taxes are turned over to the Treasury of Puerto Rico. This source has supplied about 11% of total Com monwealth resources in the past six years. Puerto Rico also receives funds from the federal government in connection with that government’s programs of contributions to the states and other areas subject to United States jurisdiction. How ever, these resources are excluded from the present analysis since they arc not diverted to the General Fund but rather to the Special Funds. In concluding this brief review of the revenue sources open to the Commonwealth government. I should like to emphasize a bit of information shown in Table I, which I consider to be highly significant: You will note that approximately 75% of our govern-

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merit's total resources are derived from sources that are extremely sensitive to changes in the amount of Commonwealth net income. These sources include income taxes — personal income taxes in particular — and consumption taxes including excise taxes on use or sale, customs duties, and license fees. Having rapidly glanced over our sources of revenue, let us turn now to the first of the principal topics assigned me for discussion: the preparation of revenue forecasts.

II.

Forecasts

I don’t believe it is necessary to enter into an extensive discus sion of the importance of revenue forecasts when planning govern ment activity. In essence, the function of these forecasts consists of giving planners an idea of the magnitude of the resources on which they can count for carrying out their programs. In turn, an estimate of future resources is one of the essential requisites in accomplishing one of the fundamental tasks of fiscal planning: to reconcile total prospective expenditures with the total amount of income anticipated. In accordance with current procedures used in planning Puerto Rican government activity, it is necessary to formulate revenue fore casts in connection with three expenditure programs which, although separate and distinct, are closely interrelated. These programs are: the Model Budget, the Six-Year Economic Program, and long-term Economic Projections. These three expenditure programs differ with respect to the horizon they cover — that is, the comparative lengths of lime for which they are projected into the future. Naturally, this difference in point of horizon is an important factor in the selection of the methods to be used in preparing the forecasts to which each will make reference. The Model Budget covers all central government expenditures, operational as well as capital, in a given fiscal year. The forecasts for the Model Budget for any one fiscal year (which begins July 1) is prepared in the month of October of the immediately preced ing year. For example, in October of the current year the forecast of General Fund revenues of the Commonwealth government was prepared covering the fiscal year beginning July 1. 1959. This fore cast has a 21-month horizon since it was prepared in October, 1958, and applies to a period that will end June 30, 1960. The second of the expenditure programs mentioned, the socalled Six-Year Economic Program, is an example of planning at intermediate term. As the name implies, the program covers a sixyear period. The first year in each period in already covered by the corresponding Model Budget. Although it takes in all items of income and expenditure, the Economic Program proper involves

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detailed planning for capital expenditures only during the five sub sequent years. 1'or example, in the case of the Sixteenth Economic Program comprising the six-year period between fiscal years 1960 and 1965, the Model Budget for the first year 11960) is currently being pre pared by the Budget Bureau. The Sixteenth Economic Program as such will be principally concerned with planning capital ex penditures for the subsequent years — 1961 to 1965. The revenue forecast prepared for this program in actual fact covers those five years only. The third program of expenditures which is prepared in Puerto Bico consists of the long-term projections made by the Planning Board. In contrast to the other two programs which have been prepared over a long period of years, these projections were under taken for the first time last year. They seek to guide fiscal plan ning at long term rather than involving concrete programs of action for execution by government agencies. The only projections made to date extend from the present to the year 1975, and therefore cover a 16-year horizon. Intermediate-term programs constitute the type of planning most suited to the purposes of the present Seminar. I shall there fore limit the following discusion to revenue forecasts prepared in connection with the Six-Year Economic Program. As already indicated, two separate forecasts are prepared for the Six-Year Economic Program. One is the forecast covering the first year of the program and is the same as that formulated for the Model Budget for that year. The other is the five-year fore cast corresponding to the remainder of the six-year period: i. e., the period beginning with the second year included in the program and ending with the sixth and last year. These two forecasts give rise to fundamentally different prob lems. The revenue forecast for the first year, as well as the ex penditure forecast, are intended to serve as the basis for decisions that will not admit of postponement, and in many cases, for deci sions that once made cannot be revoked or altered. On the other hand, since these forecasts arc prepared on dales relatively close to the period to which they refer, their formulation can take into consideration numerous variables whose behavior can be predicted with a degree of certainty at short term — say. 1-1/2 to 2 years — but not for longer periods. Unlike the first-year forecast for the Economic Program, revenue predictions for the remaining years do not require an extremely high degree of accuracy since the decisions to which they will lead are for the most part susceptible of review and modification. By virtue of the very fact that this forecast refers to periods of time that are still in the comparatively distant future, the elements of knowledge available for use in its formulation are more limited.

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This naturally means that the probabilities that the forecast will be borne out by actual events are less than in the case of the firstyear predictions. These differences regarding the need for precision and the avail ability of background data are reflected in the nature of the tech niques employed in preparing each type of forecast. Revenue fore casts for the first of the six years involved are based on a projec tion of collections from each separate major income source. When making this projection, the factors having the most significant in fluence on the behavior of collections from each source arc taken into consideration. These factors may be divided into three principal groups: First we have economic factors, made up mainly of changes in the volume of national income, in the distribution of that income by family income level, and in the functional breakdown of national income — that is, the way in which it is distributed among the different factors of production. The second group of factors is comprised of recent or prospec tive changes in the structure of the tax system. Examples would be modifications in lax rates, the adoption of new taxes, the partial or total elimination of existing levies, and the concession of special fiscal treatment for specified groups. In the third place administrative factors are also taken into account, consisting for the most part of innovations or changes in tax enforcement procedures and lax collections. The importance given to the factors making up each of the foregoing categories, and the specific nature of the elements con sidered when making these projections, vary from one group of revenues to another. For example, in the case of personal income taxes, the principal factor taken into account when estimating col lections for the first of the six years is the trend predicted for na tional income in that year. However, allowance is also made for the effects which might be had on such collections by increased efficiency of the government agency administering that tax and by changes in the structure of the lax itself, such as the concession of new exemptions, or the expiration of exemptions granted pre viously for limited periods. When estimating corporate and association income, taxes, the general business outlook is also a determining factor: moreover, the individual situation prevailing in certain industrial sectors responsible for sizeable contributions to this tax is also appraised for forecast purposes. Sugar manufacture would be an example. In the specific case of income tax forecasts for the fiscal year 1959. allowance has been made for the fact that during that period manufacturing firms granted tax exemption under the 1918 Industrial Incentives Act

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will begin to pay taxes on income earned during the year, although initially they will pay on only a part of their earnings.

The forecast of revenues from the property tax is based on the tax rates promulgated for the year in question by the legislature and on the magnitude of the tax base — that is, the assessed value of taxable property. When estimating collections from this source, the experience of recent years is also taken into account with respect to the proportion of the tax that is actually collected during the same year it is levied. Prospective collections of inheritance and gift taxes are fore cast on the basis of the number and types of pending cases that are likely to be settled during the fiscal year in question. When projecting consumption tax collections — including ex cise taxes on sales, license fees, and customs duties — the principal consideration is the trend followed by collections of each revenue item in recent years. Our estimates, of course, also take into ac count the probable effects of other factors, such as changes in tax laws, for example. The forecast of collections of excise taxes on shipments of rum and tobacco to the United States is a situation apart. The amount of these collections docs not depend on the course of events in Puerto Hico, but on factors having a bearing on the consump tion of our rum in the United States. Our predictions covering col lections from this source arc based on an estimate of consumption of Puerto Rican rum in the United States, prepared by the officials of the Economic Development Administration who are responsible for promoting the consumption of that product on the continent. With respect to the technique employed in drawing up revenue forecasts for the last five years of the six years included in every economic program, the procedure followed is necessarily very dif ferent from the one just described. These forecasts cannot be pre pared on the basis of projections for each separate source of in come for at the time of preparing the forecasts it is very difficult to predict the probable behavior of the variables that five or six years hence will influence the amount of collections from those sources. However, there is another method which, although less refined, has given satisfactory results within our experience. This procedure is based mainly on the dose correlation which has been demon strated to exist between Commonwealth net income movements and the trends followed by current government revenues. The tech nique in question consists first of estimating total revenues for the last five years of the six-year economic program. This is done by applying to the Commonwealth net income forecasts formulated bv the Planning Board a special formula that expresses the relation

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ship observed between the total of lax collections and Common wealth net income for a number of years past. The figures thus obtained are subsequently modified to reflect the influence on in come of a number of events that are bound to take place in the coming years. By way of illustrating this technique, I should like to refer to Table III, covering revenue forecasts for the last five years of the period covered by the Sixteenth Economic Program of the Com monwealth Government. As shown in that table, revenue forecasts for those years lake into account the probable effects on public revenues of certain programs that are already in progress and are aimed al improving the enforcement of income tax and excise tax provisions, as well as the program designed to speed up back tax collections which was initiated during the past fiscal year. Another development which has also been taken into consideration when making the forecasts is the expiration of the tax exemption period in the case of firms that began to enjoy that exemption between the years of 1950 and 1951. Finally, the above mentioned projections have made allowance for yet another consideration: namely, the probable effects on pub lic revenues of the fact that passenger automobiles sold from Jan uary, 1956, on, are subject to an annual license fee set in accord ance with a progressive rate scale that is extremely high for the first years but declines sharply to a nominal amount after the third year that the vehicle is in use. This rate scale in applica tion is destined to produce a very pronounced reduction in total license fee collections in the next few years, in the measure that autos purchased since 1956 have been in service for three or more years. Our estimates in this instance take into account the pro jections on the number of vehicles in circulation referred to by Mr. Sánchez Vilclla, Secretary of Public Works, in an earlier lecture.

III.

IIoiv to Increase Public Revenues

I shall now take up the second of the topics I have been re quested to discuss this morning: how to increase government rev enues. Here, as in the case of the revenue forecasts, I shall limit my remarks to the subject of how to increase current revenues and will leave to Mr. Montalvo, who will speak to you later, the prob lem of how to obtain additional resources through borrowing opera tions. Again, my comments will not refer to all current income of the government, but exclusively to General Fund receipts. To be exact, then, w'hat I plan to discuss really is how' to increase rev enues of the General Fund of the Government of the Common wealth of Puerto Rico.

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The relationship between the problem of how to increase rev enues and the topic 1 have just discussed (how to forecast those revenues) is quite obvious for those of us who have to do with public finance in countries in the early stages of economic develop ment. In all these countries — if there is an exception I am un aware of it — the magnitude of the job that must be carried out by the government as a part of its contribution to economic de velopment is so enormous that revenue forecasts prepared in con nection with public expenditure programs always point up a situa tion of extreme shortage of resources as compared to needs. Every new forecast and every new budget bring home once again the need for expanding the resources available to the state. I should point out that the problem in these countries does not stem from a lack of increase in public revenues year after year. Even in those countries that have not experienced monetary infla tion to any great extent, the development of the economy invariably produces increases in total government income in the measure that increments are registered in personal income, the acquisition of consumer goods, the value of taxable property, and other tax bases. What happens is that this secular increase in revenues as a result of economic development is often not sufficiently rapid to satisfy even the most pressing needs of the public, sector. Therefore, the problem facing the officials responsible for formulating fiscal policy in these countries is that of finding a way to speed up the growth of public revenues. Those of you who wrestle with fiscal problems will not need to be convinced of the fact that this task of accelerating the growth of government revenues is one of the most delicate and difficult for countries committed to a program of economic development. The basic reason for this circumstance is that when tax revenues of the stale increase, they tend to conflict with two other important aims of the fiscal policy followed in such countries. One of these objectives is to encourage savings, investment, and productive activities in general in the private sector of the economy. Insofar as increased tax receipts imply a proportionate reduction in earnings or remuneration derived from the productive effort — particularly among those members of society who by virtue of in come level arc in the best position to save and invest ■— such fiscal action can undermine the effort to encourage private economic activity. ■ Further, in the measure in which an increment in taxes aug ments the burden which falls on the moderate-and low-income groups, the achievement of yet another basic objective of every economic development effort is retarded: to raise the standards of living of the less privileged groups in the community. Apart from being undesirable from a humane standpoint, this sort of action

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can produce adverse political consequences in terms of economic development program progress. It is most certainly difficult to correlate the three basic fiscal policy objectives common to countries in process of development: in crease public revenues, offer incentives to entrepreneurs, and at the same time raise the standards of living of the popula tion. This is particularly true in the initial stage of the economic development process when the need for resources on the part of the government is greatest. In this stage in which per capita income is low and the annual increase in national income in absolute terms tends to remain at a low level, any significant increase in govern ment revenues can only be obtained by reducing the income of the private sector. Later on, in subsequent stages of economic develop ment when per capita income is higher and annual increments in national income are greater in absolute terms, it becomes less dif ficult to attain simultaneous satisfaction of the requirements of these objectives. I feel that in Puerto Hico in the last two decades we have had a degree of success with respect to developing a tax system that provides for harmonious handling of the conflicting demands of these three fiscal policy objectives. We have lowered, or maintained at relatively low levels, the tax burden assumed by low-and moderale-income families and have incorporated into our tax legislation numerous concessions for private economic enterprise. which have played a noteworthy role in the expansion registered in the private sector of the economy. At the same time we have also taken measures that have contributed to a significant incre ment in yield from the lax system. With respect to this last point I should emphasize the fact that the magnitude of the increase in tax collections has been consider able. lax receipts from internal sources, that is, taxes charged the residents of Puerto Rico, increased from 320 million in 19'10 lo 81-16 million in 1958. If we discount the portion of this increase corresponding to the reduced purchasing power of the dollar, the change has been from 820 million in 1910 to approximately $73 million in 1958. These figures represent an increase of 265% for the period 1940-1958. On the other hand, Commonwealth net in come at constant prices expanded during the same period at the rate of only 137%. The rale of growth in public revenues has been particularly high during the last decade. From 1949 to 1958 tax receipts from internal sources have shown an annual average rate of increase amounting to 8%. During those years Commonwealth net income has expanded at an annual average rale of only 6%. As a consequence of these developments, the proportion of Commonwealth net income represented by tax receipts from in ternal sources climbed from 9% in 1940 to almost 11% in 1958.

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It is true, of course, that our success in confronting the con flicting demands of the aforementioned fiscal policy objectives has been possible principally as a result of the rapid growth in the total volume of Commonwealth net income since 1940, and particularly during the last decade. In the last-mentioned period Commonwealth net income increased at an approximate annual average rate of 850 million. The extent of this increment has been sufficient to make it possible to grant liberal tax incentives to new enterprises, increase income available to the citizenry, and at the same time. permit the government to retain a portion of the growing Com monwealth net income. However, the year-by-year expansion registered in the level of Commonwealth net income during the last two decades constitutes only one of the factors that explains the increase in public revenues during that period. Another significant contribution to that in crease is traceable to deliberate government action designed to ac celerate the rate of growth in its revenues. To achieve this purpose the government has resorted principally to three methods or lines of action. One of these methods has been to improve tax law administration. Basically this means taking the necessary steps to insure that each taxpayer will pay all the taxes for which he is liable under the prevailing fiscal system, and that he will pay them on time. Among the measures used in achieving this purpose, two are worthy of special mention. One consists in strengthening and enlarging the staff devoted to tax collections and the work of investigation and review of the documents establishing the tax obligation in each case. The other involves simplification of procedures for tax payment. Although these measures were not adopted for the exclusive purpose of increasing taxes, but also in the interests of a more equitable distribution of the tax burden, they have contributed enormously to an increase in public revenues. Perhaps the most dramatic example of how an administrative measure can improve tax collections is had in the imposition in 1955 of the system of withholding wage-earner income taxes at their source. The adoption of the withholding collection method was pri marily responsible for the 44-percent increase in personal income taxes from §16 million in the fiscal year 1955 to 823 million in the following fiscal year. The growth in public revenues also was accelerated during the last two decades when the structure of the tax system was altered, Io render it more sensitive to changes in income levels. Here again the modifications did not pursue the deliberate aim of step ping up the growth of public revenues, but rather sought to bring about a fairer distribution of the fiscal burden. Nonetheless, in passing, they have had the effect of increasing the relative im portance within the fiscal system of those sources of revenues that

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expand rapidly in response to increases in net income. By the same token, this administrative action eliminated, or reduced the importance of, sources of revenues that are not particularly sensitive to increased income. These modifications did not result in increased collections in the year in which they were put into effect since they merely re placed certain taxes with others which for the time being produce the same revenue yield. However, in subsequent years, as economic activity expanded, these measures have occasioned a faster rale of growth in public revenues that would have been the case had they not been adopted. In Puerto Rico in the past two decades we have instituted two important lax reforms that have had the effect of increasing the progressive nature of the fiscal system. One of these reforms was effected in the early ‘40’s when the general sales lax (belter known as the 2% lax) was revoked and in its stead lax rates were increased on personal and corporate income, and on cigarettes and auto mobiles. Although, as already indicated, that reform was not planned for the express purpose of increasing taxes but with a view to a more just distribution of the lax burden, its effect on public revenues soon became evident. In subsequent years, in the measure that Commonwealth net income expanded, income tax collections rose al an accelerated rate. For example, in the last thirteen years — a period in which no substantial changes have been made in the corresponding tax rale — revenues from this source increased from S19 million in 1916 to $51 million in 1958, or by 167%. What happened was simply that when personal income increased in Puerto Rico during that pe riod, an increasing number of persons have been earning enough to make tham liable for income taxes, and at the same time the average level of taxable income earned by the taxpayers has also been ris ing. Moreover, amounts spent on cigarettes and automobiles have increased al a faster rale than consumption expenditures as a whole. The second important lax reform which has had the effect of enhancing the progressive quality of our tax system is the new legislation governing Taxes on Tse or Sale, and the related laws, which were approved in January, 1956. These laws eliminated the excise taxes which had been levied on more than 80 items com monly used in homes and business. To compensate for the con sequent inroads on public revenues, rale increases were decreed in the case of certain sales taxes and license fees on various luxury goods, and sales taxes were levied on several other luxury items that had not theretofore been taxed. It is easy to see how these changes have tended to make sales tax collections more sensitive to changes in the level of economic activity. On the one hand, various of the most important taxes

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among those eliminated had been levied on articles whose con sumption does not tend to increase to any significant degree in response to advances in economic development. A good example of this type of article is kerosene or liquid gas. The consumption of this commodity as a fuel for cooking and for lighting purposes has been declining rapidly in Puerto Rico in the measure that bot tled gas and electricity have become cheaper and more extensive ly used. On the other hand, articles on which the tax rate was increased almost all fall within the categories where consumption is apt to increase rapidly in response to economic progress. Princi pal among the latter are luxury automobiles, beer, expensive liquor. and cosmetics and perfumes. I should point out at this juncture that increasing the progres sive nature of the tax system has had the salutary effect of com pensating, if only in part, for the loss of income for the treasury resulting from income tax exemption concessions for new firms in the terms of the Industrial Incentives Act. As you know, these exemptions relate exclusively to taxes on the property owned by the companies involved, on their profits, and on the dividends they distribute to stockholders who reside in Puerto Rico. However. income received by the employees of the tax-exempt firms is not tax-free, nor is the income generated in other sectors of the economy by the new industrial enterprise. Furthermore, taxes do apply to the consumption expenditures of persons directly or indirectly benefitted by the operations of the tax-exempt concerns. By in creasing the relative importance of taxes on income and on the sale of articles whose consumption expands rapidly in the measure that standards of living improve, the two comprehensive fiscal re forms referred to here have made it possible to draw off a sub stantial share of the increase in Commonwealth net income gen erated by the activities of tax-free firms. This would not have been possible in like measure had our tax system been more dependent on taxes that are less sensitive to income changes. The third principal method employed to accelerate the increase in our government’s lax revenues was the classic method of boost ing tax rales and levying new imposts. This method differs from the former one in that it does not consist in eliminating certain taxes and increasing others but simply increases taxes without any compensatory action whatsoever. The only occasion during the last two decades when the Commonwealth government resorted on a large scale to this method was in 1951. when excise taxes on distil led liquors and cigarettes were increased, and a 5% surtax was charged on personal and corporate income taxes. In conclusion. I should like to express to you my belief that Puerto Rico’s experience during the last two decades in connection with increasing public revenues should be of some value in fiscal

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planning in all the other countries in our hemisphere that are also currently in process o£ economic development. I am aware, o£ course, that our success in inducing harmony between the three fiscal policy objectives outlined earlier was due in large measure to the rather unusual opportunity that we have had to supplement our internal resources with substantial financial injections from abroad, principally in the form of assistance from the United States government. Nonetheless, I would say that our experience at any rate attests to two important lessons which in my judgement are valid for any country under development. One of these lessons is that one of the most effective methods of increasing tax revenues is to improve administrative efficiency in enforcing tax laws and effecting tax collections. This should be done in any event, of course, with the primary aim of institu ting economies in government operations and enabling a more equit able distribution of the tax burden. However, we cannot overlook the fact that in countries where lax administration leaves some thing to be desired, this type of action can have exceedingly im pressive results on the amount of subsequent tax revenues. In ad dition, bringing collections up to date and eliminating tax evasion not only immediately increase public revenues but also contribute to the creation of a favorable civic spirit with respect to compli ance with tax laws. The other major, lesson which in my opinion is offered by Puerto Rico’s experience in fiscal affairs in the last two decades is that in countries whose volume of economic activity is undergoing constant expansion, it is possible to speed up the rate of growth in public revenues substantially by reforming the tax system in such way to increase the progressive characteristics thereof. As a means of increasing taxes, these reforms offer the advantage that they are generally approved by the bulk of the public — for two principal reasons: One is that these modifications ordinarily tend to reduce the tax burden carried by low-income groups. The other is that they do not immediately increase the tax burden in net terms but merely alter its distribution so that it responds more closely to the principles that everyone pay according to his economic pos sibilities. Furthermore, as I have already pointed out, increasing the progressive application of the tax system makes it possible to take better advantage of the increase in net income generated by firms enjoying tax exemption, thus offsetting the fiscal sacrifice implied when such exemptions are granted. Thank you.

tot a l

RESOURCES

TABLE i

1.2

61.6 18.7 14.9 11.2 6.7 3.3 6.8

6.6

2.9 6.6

5136.8 126.8 111.8 105.0 1.2 33.4 16.4 14.1 1.8 1.1

58.1 17.4 14.0 10.6

34.6 15.8 15.8 1.8 1.2

$132.5 122.5 106.8 100.6

1954

$141.3 131.3 113.9 106.4 1.6 31.8 16.0 13.3 1.5 1.0

1955

•1.3 7.0

7.7

67.8 21.3 16.7 10.8

1.2

$156.4 146.7 128.7 120.4 1.6 40.5 22.5 14.9 1.2 1.9

1956

2.8 7.2

7.0

69.9 23.4 18.2 11.3

$168.7 158.7 139.4 130.7 1.5 46.8 25.4 18.1 1.9 1.4

2.6 6.7

8.2

72.9 23.3 18.3 13.1

2.0

$184.2 166.3 147.7 137.6 1.7 50.7 26.6 19.7 2.2

1958

GENERAL

1957

COMMONWEALTH GOVERNMENT 1953 - 1958 (Millions of Dollars)

1953

THE

I. REVENUES A. From Internal Sources 1. Taxes Property Taxes Income Taxes Personal Corporate Associations Withheld, non-residents Inheritance and Gift Taxes Excise I axes - Grand Total Alcoholic beverages I obacco products Petroleum products Motor vehicles and accessories Electrical and gas appliances Others

TOTAL

FOR

20.0 41.1

43.7

391.1 123.6 97.3 68.4

6.8

$919.9 852.4 748.3 700.7 8.3 237.8 122.7 95.9 10.4 8.8

Total Revenues Fiscal Years 1953-58

FUND

YEARS

4.5

4.8

42.9 13.4 10.6 7.4

100.0% 92.7 81.4 76.2 1.0 25.8 13.3 10.4 1.1 1.0

Percent of Total Revenues and Borrowings Fiscal Years 1953-58

FISCAL

PUBLIC REVENUES

Source: Department of Finance. Office of Economic and Financial Research.

19.3

10.0

<) 5

3.5

6.4 5.1 .3 1.0 8.7

18.2

17.4

15.0 10.0

BORROWINGS 10.0

3.1

•1.2 3.3

10.0

•l.l 4.9 3.4 .3 l.l 8.3

3.2 •1.6 3.2 .3 l.l

3.2 •l.l 2.8 .3 1.3 6.8 •l.l 2.1

Customs duties 2.7 Licenses 3.8 Motor vehicles 2.6 Alcoholic beverages Others 1.0 2. Non-Tax Revenues Income from Lottery •1.0 Miscellaneous income items B. From External Sources Excise taxes on shipments 15.6

TABLE I (COXT’D)

11.3

67.5

101.0

18.5

18.0

7.3

3.2 2.0

2.6 3.2 2.3 21.2 29.6 21.3 1.7 6.6 47.6 29.1 18.5

5.5 ■1.2 .3 l.l 10.1 6.1 1.0

384

PROCEEDINGS ECONOMIC PLANNING SEMINAR

T ABLE I I

195-1

17,426

November 21,

1958.

;

18,235

128.632 120.366 1.571 40.473 22,502 14.872 1.234 1.865 1.211 67,817 21.292 11.962 8.258 1.972 46.525 16.714 10.831 7.747 4.280 998 986 670 4.299 4.869 3.451 269 1.149 4.425 8.266 5.172 3.094

$146.867

1956

19,295

139.462 130.745 1.543 46.777 25.393 18,100 1.927 1,357 896 69.955 23.435 12.422 9.916 1.097 46.520 18.244 11.296 6,958 2.848 765 11,532 751 4.126 6.374 5.063 265 1.046 5.200 8.717 5.232 3.485

195 7

: 19’9

18,528

147.760 137.637 1.741 50.735 26.610 19.722 2.165 2,238 2.027 72.130 23.254 12.574 9.704 976 48.876 18.295 13.063 8.242 2.565 777 2.136 614 3.184 5.529 4.185 268 1.076 5.475 10.123 6.088 4.035

20.000

161.300 149.000 1.900 54.500 29.000 21.500 2.500 1,500 1.500 76,300 24.000 13.000 10.000 1.000 52.300 19.000 14.500 8,800 2.500 800 2,700 700 3.300 9.000 7.500 300 1.200 6.200 11.900 7,100 4.800

8166.288 -SI81.300

1958

Department of Finance

COLLECTIONS

Financial Research.

15.012

$131.303

1955

113.877 106,410 1.615 31.782 15,951 13,282 1.526 1.023 730 64.481 19,494 11.310 7,344 840 44.987 15.238 11.430 7.498 4.116 1.073 651 572 4.409 4.557 3,183 266 1.108 3.245 7,467 4.222 3,245

;

111.773 104,986 1.223 33.450 16.435 14.137 1.825 1.053 1.224 61.562 18.723 10.603 7.390 730 42.839 14.940 11,180 6.707 3.275 1.277 469 ——— 4.991 4.295 2.768 264 1.263 3.232 6.787 4.432 2.355

$126,785

’Estimate? of the Office of Economic and

Income from Lottery Miscellaneous income items I'rom non-Commonwcalth Sources: Excise taxes on extraterritorial shipments

Inheritances and Gift Taxes Taxes on Use or Sale, Total .. Alcoholic Beverages Distilled spirits Beer Other Alcoholic Beverages Other items ................................... Tobacco products Petroleum products Automobiles and accessories . Electrical and gas appliances Admission to public spectacles Horse Races Insurance premiums Miscellaneous License fees Motcr vehicles Alcoholic Beverages Others Customs duties Non-Tax Revenues

Total from Commonwealth Sources Taxes Property Taxes Income Taxes, Total . ... ’ ’ ’ * ’ Personal ...............................’ ’ ’' Corporate Associations Withheld from non-residents

TOTAL

actual :

(FISCAL YEARS I960 - 1965) (in thousands}

21.000

170.600 158.300 •2,100 59.800 31.000 24,000 2,800 2.000 2.000 79.700 24.500 13.500 10.000 1.000 55.200 20.000 15.000 9.400 2.500 800 3.200 700 3.600 8.000 6.500 300 1.200 6,700 12.300 7.100 5.200

$191.600

; $212,900

1961

$237.000

1962

t $263.100

1963

t 5288,200

1964

$3H.9O¿

1965

Years during Sixteenth Economic Program.

FORE CAST’

SIXYEAR ECONOMIC PROGRAM

1960

forecast of general fund revenues for the sixteenth

---------

PUBLIC REVENUES

PROCEEDINGS ECONOMIC PLANNING SEMINAR 386

T ABLE III

(in millions)

—

3.2 .4 .1 3.3 .6 /.0

§ 205.3

S 236.5

—.5

.1 5.0 .3 12.3

6.2

3 224.7

5 262.1

-1.0

8.8 .9 ,2 7.0 2 17.1

$ 216.0

1963

$ 286.6

-1.6

10.7 1.1 .2 7.0 .2 19.2

$ 269.0

1961

S 312.7

-2.2

15.9 1.5 .3 3.0 — 20.7

$ 294.2

1965

1961

S 212.9

1962

DETAIL OF FORECAST OF GENERAL FUND REVENUES FOR THE SIXTEENTH SIX YEAR ECONOMIC FROGRAM (FISCAL YEARS 1961 - 1965)

Current revenues, as forecast, unadjusted a Adjustments b Additions deriving from: Taxes to be paid by firms that up to the present have been exempt: On corporate and association income On income paid to non-residents On property Administrative improvement Payment of back taxes Total additions Subtraction owing to effects of the descending-rate scale on automobile license fees Current income based on the projection, with pertinent adjustments

a Figures obtained bv applying to the forecasts of net Commonwealth income (prepared by the Bureau of Economics and Statistics. Planning Board) the following formula of the relation between General Fund revenues (Y), and net Com monwealth income (X): Yc= — $ 18.9 .167681 X. b According to estimates of the Office of Economic and Financial Research, Department of Finance.

VOLUME III

ECONOMIC PLANNING SEMINAR

October 27 — November 28, 1958

FOREIGN INVESTMENT IN PUERTO RICO WORK PERFORMED BY THE GOVERNMENT

DEVELOPMENT BANK By Roberto Montalvo

Executive Vice President Government Development Bank

FOREIGN INVESTMENT IN PUERTO RICO WORK PERFORMED BY THE GOVERNMENT

DEVELOPMENT BANK By Roberto Montalvo

Executive Vice President Government Development Bank Sixty Years oj Relations ivith the United States

The United States constitutes the only important source of out side capital which nourishes the Puerto Rican economy. The U. S. investor provides for the local economy the capital funds needed in excess of what the latter is able to generate on its own account. The explanation for this situation lies in the sixty years of close political, economic and fiscal association between Puerto Rico and the United States. Thanks to their bond of citizenship and common monetary and customs systems, there has been a free flow of persons, merchandise and capital between the two areas. One especially significant aspect in these relationships, from the point of view of investment, is Puerto Rico’s immunity to fed eral taxes, except for certain special cases. The Government of the Commonwealth is completely at liberty to establish its own tax sys tem in the manner best suited to its needs. Further, customs duties collected in Puerto Rico, as well as federal taxes paid on Puerto Rican tobacco products and rum entering the United Stales market, revert to the Commonwealth treasury. The sixty-year flow of United States capital to the Puerto Ri can economy has passed through two distinct stages: “spontaneous investment’’ and “promoted investment.” First Stage: Spontaneous Investment.

The first investment stage started at the beginning of the cen tury, with the bulk of the capital influx occurring prior to the year 1917. The flow of investment funds during this stage was not in response to any conscious effort on the part of the local economy. It took place in the almost absolute absence of a specificallydefined public policy of economic development. These investment funds were channelled primarily to the development of a single specific industry and the production of one sole item: sugar. This

392

PROCEEDINGS ECONOMIC PLANNING SEMINAR

called for the purchase of large extensions of cultivable land ■— the most basic of natural resources and one of which Puerto Rico of a certainty has a very small supply. During the period from 1900 to 1930. it is estimated that some 8120 million in foreign private capital entered Puerto Rico, the majority of which was devoted to the development of the sugar industry. The impact of this investment can be judged from the fact that sugar production increased from some 70.000 tons in 1897 to a level of more than a million tons in 1934. The sugar industry became the cornerstone of the Puerto Rican economy but suffered from certain inherent structural weaknesses. There is no doubt that the development of the sugar industry pro duced certain advantages for Puerto Rico, but this form of develop ment brought with it a series of severe complications of a political, economic and social nature. The industry was never able to offer adequate employment oportunilies to a population in constant process of growth. For those who did get jobs, wages were low and the work seasonal. In turn, family income was low7 and unstable, and for many there was no possibility to supplement that income through direct access to yields from the land. During the decade following the end of the First World War. the Puerto Rican economy and the welfare of the people continued to be tied to a product whose market began to undergo a marked deterioration. At that time, there were no subsidies or systems of protective quotas. As the difficult economic conditions of 1930 made themselves increasingly felt, it became obvious that Puerto Rico cotdd not sur vive on a one-crop economy: sugar. However, there seemed to be no other escape exit or less homogenous and more efficient system of economic development. Despite S230 million in Federal Govern ment expenditures and Ioans to Puerto Rico during the Great De pression, the average Puerto Rican was no better off economically at the end of the Depression than he had been at the beginning. He barely managed to stay alive!

Transition Period Throughout this whole first period political activity centered on the controversial theme of Puerto Rico’s political status: Fed erated Statehood or Independence. In the 1910 elections, however. a new and victorious approach prevailed: the economic and social status of the Puerto Ricans. Leaders of the party presently in power based their political platform on a well-defined program ot economic and social development. And, in the 1944 elections, that program was confirmed by an overwhelming majority of the elec torate. The core of the program on which every other consideration rested was the creation of a new public awareness of the power

FOREIGN INVESTMENT IN PUERTO RICO

393

and duty to initiate new and varied forms of production. Puerto Rico had to evolve toward a manufacturing economy, and that would require substantial injections of new capital, preponderantly from the United States.

The period of the Second World War was one of transition and organization and resulted in considerable savings on the part of the public treasury. Substantial fiscal surpluses were piled up, in part as the result of the reimbursement of federal taxes on Puer to Rican rum sold in the United Slates. The resource reserves this created were analogous to those which originated during the conflict in many nations that supplied the war effort. The Puerto Rican Government zealously preserved and utilized a large part of those reserves for the wartime creation of a number of public corporations -whose existence was basic for promoting industrial production and for the achievement of higher standards of living. The funds were used for purposes of complete financial strengthening and reorganization of two basic public authorities: The Water Resources Authority of Puerto Rico and the Water Sup ply and Sewage System Authority of Puerto Rico. Likewise, certain government agencies were created and capitalized, including among others the Industrial Development Company, the Government De velopment Bank, and the Transportation Authority, note known as the Port Authority. Due to the scarcities brought about by the war and the ab sence of a local industrial tradition, very little could be done at the moment to induce private Puerto Rican capital to participate in industrial operations. However, as an initial step, the Industrial Development Company acquired a cement plant belonging to the Federal Government and constructed factories for the manufacture of glass containers, cardboard, ceramics and lealhergoods. Some of these factories operated at a profit while others did not. However. taken as a whole, the effort put forth in the creation of these factories demonstrated that the operation of new industries in Puer to Rico was economically feasible. These firms were eventually sold to local entrepreneurs who have continued to operate them success fully.

The decision to sell these factories and thus free government executive talent from the administrative burden which they had implied marked the real beginning of the development to the in dustrial phase of the over-all program of economic expansion. Through its development agencies the government was in a better position to concentrate all its energies on the more important task of guiding and encouraging the private investor to undertake great er and more varied forms of productive investment. Then it was that the “promoted investment” period began to take form.

394

PROCEEDINGS ECONOMIC PLANNING SEMINAR

Second Stage: Promoted Investment The limited capital resources available, added to the almost general apathy of the local investor with respect to undertaking industrial activities, induced the government to follow a system for the importation not only of investment capital, but also of tech nological “know-how”. The tax incentive program was created as the major drawing card in this effort. The benefits of that tax program are applicable equally to the local industries and those from abroad. Certain specific types of industrial investment were declared elegible for tax exemption, and the Investment Develop ment Company and the Economic Development Administration were equipped to offer a whole series of other aids and special incentives. such as technical and marketing studies, industrial buildings, per sonnel training, etc. In addition, intermediate and long-term credit sources were created. For its part, the Industrial Development Company grants special loans of a promotional nature, while the Development Bank undertakes to finance those projects that carry less risk and basically conform to customary banking norms. The endeavor to develop private industry was accompanied by parallel efforts in the public sector of the economy. The need arose for different government units and agencies to invest substantial amounts of capital to construct the new environment required by an economy in process of mutation and growth. Funds were devoted to amplifying and creating new basic production facilities, such as electric power, water systems, highways, schools and hospitals. A part of the financing could be satisfied from current income of the Treasury and the funds generated by the public corporations themselves; another part was borrowed from local resources. However, owing to the shortage of local resources, the greatest portion of the loan funds came from the I nited States financial centers. As the sole agent of the government and its various dependencies, the Government Development Bank was assigned the task of negotiating loan capital. Investment during this Promoted Investment period reached the sum of a little more than 8100 million in 1950 and almost 8270 million in 1958. The 1958 investment level represented 21% of the gross product of the economy during that year. Between 1918 and 1958, total investment amounted to $1,850 million, of which approximately 40% came from the United States. This compares with an average of less than 10% obtained from abroad by Latin American countries as a whole. By fiscal year 1958, foreign investments at long term, partic ularly in the form of loans to the government and its agencies, reached the sum of 8149 million, compared with 846 million in 1950. The net annual influx of direct investment in private in dustrial enterprise increased from Sil million in 1950 to $77 mil

FOREIGN INVESTMENT IN PUERTO RICO

395

lion in 1958. This new flow of funds, made up of both investment capital and loans, has been widely distributed among an infinite number of industrial operations and public enterprises, rather than being concentrated principally in a single industry as was the case in the past with the sugar industry. The 500 new factories estab lished under the economic development program constitute the most outstanding achievement of the Promoted Investment period and represent a completely new order in the matter of foreign invest ment. Secondary Investment

Apart from the programs developed by the governamental agen cies through credit negotiated on their behalf by the Government Bank, most of the investment funds came as the direct result of the tax incentive program and the industrial promotion campaign. W ith the economy advancing at a healthy rate in response to the increase in investment in primary productive facilities, the Puerto Rican Government and the private economy were placed in a position which permitted them to make better use of certain advantages that accrue to the peculiar association with the United States. The country made good use of federal aid funds, offered on a par with public funds supplied by the Commonwealth, in order thus to assure a more rapid development of highways, schools, air ports, etc. Large-scale construction of public and private housing projects was made possible as a result of the guarantees offered by the federal government (National Home Administration and Fed eral Public Housing Administration) covering the mortgages origin ated in those projects. Such mortgages constitute sources of in vestment for private institutions. Total mortgage insurance extended by the federal government on private housing projects in Puerto Rico was in excess of S100 million during the past seven years. Since almost all the funds available for housing loans — immediately or at long term — come from the United Slates, this federal insurance constituted the de cisive factor back of the noteworthy increase in new housing con struction. Agriculture could make better use of borrowing facili ties offered by various federal agencies which during the fiscal year 1956-1957 extended credit to a total of S37 million. The fact of taking advantage of these and other opportunities to bring about an additional inflow of investment capital into the economy presupposes the fundamental existence of basic growth process in that economy that will permit the beneficiaries of the in flow to count on adequate income in order to meet their obligations. This is applicable to individuals as well as to public entities. Second ary investments are for the most part subordinated to the continuous growth in the productive capacity of the economy and to increased

396

PROCEEDINGS ECONOMIC PLANNING SEMINAR

primary investment which in Puerto Rico’s case, as we have al ready seen, calls for heavy capital importation, principally from the United States. Functions of the Government Development Bank

Previous lectures described the functions of the Economic De velopment Administration, as the spearhead of promotion, and of of Industrial Development Company, as the operations vehicle in the industrial investment program. Through its loans for private industry, the Government Bank also participates in these common efforts. The Bank also has the responsibility for negotiating loan funds for practically all public agencies of Puerto Rico. In this respect, most of its efforts are addressed to United States private investors, who comprise the most important source of such funds. The Government Development Bank is an autonomous public corporation. Although a part of the Government of Puerto Rico, it operates for all practical purposes outside the governmental ad ministrative framework. The Bank was created by legislation in 1942 and was reorganized to take on its present structure in 19-18. It is governed by a Board of Directors composed of seven members, four of whom come from the executive branch of the government and the remaining three from private enterprise. All are appointed by the Governor of Puerto Rico. Its industrial loan operations are coordinated with the work of other industrial development agencies through the membership of the Economic Development Administra tion on the Board of Directors. The President of the Bank is. in turn an ex officio member of the very important Investment Com mittee of the Industrial Development Company. Coordination with other fundamental government programs, such as those which have to do with public finance and planning, is handled principally through the other three members of the Executive Branch: The Secretary of State, the Secretary of Finance — who is President of the Board of Directors ■— and the President of the Planning Board. Bank executives are named by the Board of Directors. The fiscal agency functions of the Bank as financial represent ative and advisor of public agencies when these enter the loan mar ket are undertaken on a contractual basis. By way of original capital, the Government Development Bank received legislative appropriations to a total of S20.5 million. Al though the primary objective of the Bank is not to realize a profit but to contribute to economic development and serve the public agencies that undertake to borrow, the Bank has accumulated suf ficient earnings in order to build up a surplus of more than 810 million since it began operations. Experience shows that the Bank should have a strong financial position in order to undertake with

FOREIGN INVESTMENT IN PUERTO RICO

397

efficacy its functions of fiscal agent and supplier of credit to private enterprise, and also to obtain Joan funds for itself from time to time and in this way enlarge its radius of operations without hav ing to call on additional legislative appropriations. The Bank has obtained loans on various occasions to sup plement its owm resources. In 1957, it borrowed S15 million from a group of local and United Slates banks by issuing obligations supported exclusively by its general credit standing, i. e., without the necessity of offering any specific collateral. For the purpose of facilitating a more ample distribution of its obligations, the lat ter are issued to bearer in some cases and to designee in others. In addition to representing a step toward creating a more ample mar ket for Government Development Bank obligations, these securities issues also opens a new avenue of access to investment funds that may be needed by public and private sectors of the Puerto Rican Economy. The Government Bank does not compete with commercial bank ing. Il does not receive deposits from the public in general, al though it is permitted to receive them from commercial banks and government agencies. The loans made by the Bank are at long term — a form of credit not generally obtainable from private institutions in Puerto Rico. The services rendered by the Bank in its role of fiscal agent are not provided by any other institution at present in Puerto Rico. Certain of its powers, although on a limited scale, are similar to those corresponding to a central bank. It can rediscount commercial paper for the local banking sys tem, but its services in this regard have not been necessary except on rare occasions. It can lend securities of funds to the commercial banks, and has done so, to a limited extent and at short term. In effect, the Government Development Bank supplements financial activities of private institutions and provides services which perhaps would not otherwise be available, as for example, those correspond ing to a check clearing house for the commercial banking system. Government Development Bank: Industrial Loans

The Government Development Bank provides intermediate and long term loans preferably for manufacturing activities, although, on occasion, it lends for projects of other types if they contribute to economic development in general. The enterprise may be new or previously established; local or foreign; it may or may not en joy tax exemption; it can be large, medium or small. The Bank grants loans in participation with other private financial institu tions, with the Industrial Development Company or the Federal Small Business Administration. It also offers assistance to entre preneurs in obtaining additional sources of financing within or without Puerto Rico. The Bank purchases loans granted original

398

PROCEEDINGS ECONOMIC PLANNING SEMINAR

ly by the Industrial Development Company that have a good re cord, and it also sells portions of its own loan portfolio to other institutions. The interest rate in force amounts to 6% annually for industrial credits and slightly more in the case of lending for other pur poses. For the construction of industrial buildings long-term loans extend up to 15 years and cover as much as 60% of the assessed value of the real property. In the case of machinery and equipment, the life of the loan fluctuates around 5 years, and up to 50% of the assessed value is lent. In addition to lending for the construc tion of buildings and the purchase of machinery and equipment, loans are also granted by way of providing operating capital; how ever, with very few exceptions, a first mortgage is required as col lateral. Loans are not disbursed immediately upon approval. Disburse ment takes place once the buildings are constructed or the machinery and equipment installed. To obtain interim financing from com mercial banks during the period of installing machinery or con structing buildings, borrowers make use of letters of commitment extended by the Bank. This procedure is another of the mechanisms employed by the Bank in following its rule of not competing with credit facilities offered by commercial banking. Since the beginning of its operations, up to June 30, 1958, the Development Bank had disbursed 862 million to private enter prise. This amount includes 825 million for industry as such: So million for other purposes, such as the development and improve ment of tourist facilities; 826 million in temporary financing for low-cost housing projects (prior to 1951) ; and S3 million to com mercial banks. With respect to the industrial sector, it is estimated that some 890 million in private capital was mobilized as a result of the S25 million in credit extended by the Bank to industry. It should be re membered that firms borrowing from the bank represent only a limited section of a large variety of new companies operating in Puerto Rico, the great majority of which were financed by theii own owners. About a half of the 825 million in loans was granted to firms promoted by outside investors. Housing Ioans granted by the Government Development Bank constitute a good example of the type of financing granted for pur poses outside the industrial area. The construction of large private low-cost housing projects required special encouragement during the first stage of the economic development program. Domestic housing construction firms and financial institutions had not yet accumulated a great deal of experience with this type of project. The Government Development Bank directly financed the construc tion and sale of some of the first really big housing projects; the

FOREIGN INVESTMENT IN PUERTO RICO

399

mortgages on these were guaranteed by the Federal Government. The Bank also assisted a local commercial bank in its efforts to enter this field of financing for the first time. The happy outcome of these pioneer efforts paved the way for private institutions to take charge of this type of financing thereafter and enabled them on their own account to develop a market for mortgages of this nature in the United States.

The Government Development Bank'. Fiscal Agent. The Government Development Bank, in its role of Fiscal Agent for the government, carries out technical and promotion functions analogous to those of the Economic Development Administration, although in a different field and in conjunction with a different group of investors. The orderly development of the economy calls for the pub lic corporations to provide an infinite number of facilities which are highly necessary at present, but the cost of which must be defrayed out of income from future operations. The Government of the Com monwealth and the governments of the seventy-five municipalities must provide certain facilities that are not income-producing in themselves, such as schools, highways, hospitals, etc., and then pay for them with future tax collections. The necessary funds for these constructions, expansion and improvement projects have to come from the private investor, for the most part from the United States, and it is the Bank’s job as fiscal agent to plan and execute however many public debt issues may be necessary. The existence of a single authorized fiscal agent carries certain valuable advantages. Organized as a public corporation, the Gov ernment Development Bank is endowed with operational flexibility; it eliminates the duplication of organization and effort which would result if each entity went to the market to negotiate loans independ ently. In addition, disorderly competition is eliminated, and an institutional means is provided for accumulating financial experience for the benefit of all agencies assuming public debt commitments. As a part of its fiscal assignment, the Bank counsels, plans, coordinates and executes financial programs for almost all of the public institutions in Puerto Rico. It provides pertinent technical services for public debt issues. The Bank tries to satisfy all fin ancing needs of the government and its agencies, but in an orderly way, and always endeavours Io use the form of financing which best meets prevailing conditions in the money market in the United States, as well as the needs and nature of the interested agencies. The Bank also advises directors of the various government bodies on performance, events, or circumstances which may affect their respective ability to make use of credit already established or to be established. Further, the Bank in its offices in New York

400

PROCEEDINGS ECONOMIC PLANNING SEMINAR

and Puerto Rico has a staff of financial specialists who have had wide experience and are in intimate contact with the money market in the United States, that supplies the diverse demand for funds. In turn, these officials are constantly being informed of, and re main alert to, current and future financing needs of the Common wealth, municipalities and public corporations. Since taking on the assignment of fiscal agent in 1915, the Government Bank has supervised financing amounting to some 8700 million for the government and its agencies. About S300 mil lion of this has been in the form of long-term loans for permanent improvements, covered by bond issues. Short-term financing, payable from current revenues or legisla tive appropriations; interim financing, to be utilized immediately and paid for later with proceeds from bond issues: and long-term financing — all imply special problems in negotiation. The funds arranged for arc private in origin and come mostly from the United States. A part of these have been provided directly by local banks whose expanding resources have permitted them in recent years to share in the various financing programs. In many instances, local banking participates with the United States on an increasing ly active scale in the syndicates which are formed to compete in the auctions of bond issues. Another portion of financing has been provided by the Government Development Bank from its own re sources. On occasion, the Government Development Bank has had to advance funds temporarily to some agencies in anticipation of ob taining long-term financing on their behalf. This happens when there is not enough time to obtain interim financing from com mercial banks or when the agency does not yet have an established credit rating. These advances by the Bank ordinarily have been refinanced with some other institution, and the need to extend them is gradual ly diminishing. Interim and short-term financing is always contracted by the Government Development Bank by means of private negotiation with the institutions who will do the lending. Long term financing. however, involves the issuance of promissory notes or bonds, and the sale of the securities is effected either through private negotia tion or by means of auctions attended by several syndicates. Long term financing is negotiated by means of private arrangement in the case of an issue of a new agency whose credit has not yet been established; when securities market conditions indicate that a pub lic auction is not advisable; or when the issue involved is too large to be underwritten by the interested syndicates. Private negotia tion permits adjustment of the maturity and interest terms of the issue in such way that they will be acceptable to the investor as well as to the agency on tvhose behalf the funds are sought.

FOREIGN INVESTMENT IN PUERTO RICO

401

An integral part of all these activities is the promotion of in vestor good will with respect to participating in financing. Rather than a promotion project as such, the work really constitutes a financial information program. Financial Information Program

The efforts of this program are directed toward institutional and individual investors as well as toward those persons who are in a position to influence the opinion of investors in different financial centers throughout the United States. A permanent financial com mittee was organized which, although essentially connected with the Bank’s activities as fiscal agent, is composed almost in its entirety of representatives of agencies served by the Bank. Through this Committee, all member agencies participate in the financing and planning of this informative effort. The Committee’s program, most of which is carried out by the Bank, includes: dissemination of economic and financial infor mation on Puerto Rico throughout the United States; periodical re ports on the financial situation and on economic and social develop ment, in the form of a Quarterly Report to Investors; distribution of special explanatory literature; preparation of especially-designed pamphlets for distribution on the occasion of floating issues of bonds on behalf of the Water Resources Authority, the Water Sup ply and Sewage System Authority, the Capital of Puerto Rico, etc.; making the necessary arrangements for bringing to Puerto Rico small groups of financial editors, commercial and investment bank ers, and institutional investors to give them a first-hand view of the progress achieved on the island and enable them to meet the men who guide its destinies in the public as well as private sectors; hold ing meetings between Puerto Rican officials and groups of investors and financial writers in important financial centers such as New York, Boston, Philadelphia, Chicago, San Francisco, Los Angeles, and other cities; arranging for the participation of Puerto Rican officials at banking and financial conventions held in die United States. To accomplish, among others, this purpose of executing the financial information program the Government Development Bank maintains an office in New York City. This permits Bank officials to be in close daily contact with banking institution executives and private investors and contributes to a better understanding of the conditions and demands of the money market that can have a bear ing on Puerto Rican securities issues at a given moment. Through the New York office these efforts can be directly and personally channeled to pertinent persons and, at the same time, the Bank al ways has up-to-date information with respect to conditions prevail ing on the market within which it must operate. To supplement

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these efforts the Bank uses the services of a competent public rela tions firm which assists in bringing the inherent merits and reputa tion of Puerto Rican securities issues to public attention. IVliy Sponsor a Financial Information Program? Some of you may question the need for a financial informa tion program. After all, Puerto Rico has access to the United States money market. Its association with the United States in volves a common monetary system that guarantees the free move ment of funds between the two areas. Even more important, inter ests earned by those who invest in Puerto Rican government obliga tions are completely exempt from Federal as well as state taxes. The answer is simple: the United States money market is high ly competitive. Puerto Rico is only one of the innumerable com petitors — public as well as private — who have access to that market, and whose purpose in having recourse to it is identical: to satisfy their credit needs under the most favorable terms pos sible. However, the credit supply is relatively scarce in comparison with the volume of demand. The average United Slates investor still knows very little about Puerto Rico, isolated by' water and 1,600 miles from New York. There are still memories of the Puerto Rico of the Great Depression. Puerto Rico has always succeeded in selling the bulk of its public obligations in the United States, although the demand for these securities usually was very limited. The current situation represents an improvement in this respect. Even so, due to Puerto Rico’s relatively disadvantageous situation in the market, we have to pay a higher interest rate on the funds we need — approximate ly 1/2 percent higher than that paid by comparable securities that are U. S. in origin. The number of investors disposed to buy our bonds spontaneously continues to be limited. Fortunately. Puerto Rico has some very good points that can be brought out through the Financial Information Program. Among other things, its economy is in rapid process of expansion, and the country has a well-defined economic development program. The government has a perfect record of meeting its obligations: payment has never been late, nor have there been any instances of failure to honor these public securities. Further, Puerto Rico enjoys a stable, democratic political system. A whole series of constitutional, legal and ad ministrative measures have been adonted to insure punctual and strict compliance with government obligations. Implications of Promoted Investment The political and social implications of the present stage of foreign investment in Puerto Rico are in marked contrast to the initial stage of investments in the sugar industry. Attitudes and interests of the present investors from abroad are as highly diver

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sified as are the different varieties of new, productive industries — as varied as the different forms of investment themselves. Today there are no massive investments in an individual industry devoted to the production of a single product. The new type of investment does not involve the creation of huge land holdings, which would tie both land and people to the fortunes of a single industry and to the marketing vicissitudes of a single product. The new sources of production have provided permanent em ployment for many, with reasonably high wages and prospects of higher remuneration in future. Standards of living have been ris ing rapidly, and one of the most significant social aspects has been the dynamic growth of the middle class. Puerto Rico’s production continues to enjoy free entry into the United States market, and although the latter is highly competitive. Puerto Rico now no longer has all its eggs in one basket: We enter that huge market with many and a great variety of products, in distinct contrast to the situation in the past. As a matter of fact, during the recent eco nomic recession in the United States, Puerto Rico’s small economy fared better than did that of the United States in general, compar ing to advantage with many other specific areas within the union. Another important aspect of this new type of foreign invest ment in Puerto Rico is the effect it is having on the capital forma tion process within the country. Puerto Ricans now are accumulat ing capital, and gradually the ability of local funds to fill the is land’s financial needs will take on greater importance. The dynamic impetus of the economy already has attracted new and different investments from abroad, unsponsored by any specific promotional efforts. Local investors have been encouraged to devote their resources and talents to activities completely dif ferent from the traditional investments in real estate and com mercial pursuits. The beneficial experience and success enjoyed by Puerto Rico and the private investor as a result of the remodeling of the basic structure of the economy would appear to be laying the ground work for a new cycle of Spontaneous Investment.

ECONOMIC PLANNING SEMINAR

October 27 — November 28, 1958

URBAN PLANNING AS RELATED TO ECONOMIC PLANNING By Filiberto García

Director, Urban. Planning Bureau Planning Board

URBAN PLANNING AS RELATED TO ECONOMIC PLANNING By Filiberto García

Director, Urban Planning Bureau Planning Board Commonwealth, Regional and Municipal Economic Planning

During this Seminar on Economic Planning you have probably been given a number of definitions on what planning is, including the specialized areas such as economic and social planning as well as physical planning, in terms of Puerto Rico as a whole. A few minutes ago my friend and colleague, Rafael Ignacio, discussed the theme of regional planning, which is being given increasing emphasis with a view to more effective coordination of the eco nomic, social and physical planning of Puerto Rico’s rural and urban zones. As mentioned by Mr. Ignacio, regional planning makes it possible to visualize the economic development in prospects for these areas and relate it to the future economic growth of the is land. In consequence, planners are able to predict the physical environment that will result from such development, including the social aspects that arc bound to accompany the growth process. The economic and social life of the regions mentioned by Mr. Ignacio, which includes both urban and rural zones, oscillates around a center of urban activity. Therefore, demographic and economic projections covering the general framework of Puerto Rico, plus those of a regional nature that are in line with the former, will be broken down among the municipalities that make up the different regions. From the foregoing we see that planning in Puerto Rico’s case begins with the island as a whole, proceeds to separate areas called regions, and from there to the more specific areas such as urban zones. Development planning for any town or city depends on the economic development anticipated for the municipality of which it forms a part, in relation to the economic growth of other municipali ties within the region, and in accordance with economic projections covering the region itself and those corresponding to all of Puerto Rico.

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Purpose of Planning

In its simplest form, the objective of planning is to provide a better environment for the human being in economic and social as well as physical aspects. In areas having an incipient develop ment, as is the case of Puerto Rico, we may assume that every individual aspires to a job with a degree of security, staying healthy, providing a home and education for his children, and participating in the social and spiritual aspects of community life. This indivi dual and his family in company with others around them form neighborhoods or zones that in turn probably aspire to providing schools, parks, hospital facilities, street improvement, shopping cent ers and garbage collection services, In like fashion these neigh borhoods make up communities, towns and cities where the common aspirations are reflected in terms of improved traffic and trans portation facilities, water supply and sewerage, street cleaning and maintenance, provision of school, housing programs, and the elimina tion of slum districts. All these wants and needs combine to form the aspirations of the entire people of Puerto Rico: economic, social and physical growth of the island in terms of industrial development, agriculture and the tourist trade and the factors contributing to such develop ment, such as commercial and industrial port facilities and highway construction. These aspirations also find expression with respect to the provision of public services and facilities, such as hopitalization, education, water supply and sewage disposal, and in terms of public welfare programs and the construction of urban and rural housing. The above described aspirations are reflected in government programs aimed at creating more wealth and assuring its equitable distribution. This endeavor seeks to achieve economic growth by means of industrial development of the type that will reflect an ade quate distribution of production in the various regions of the coun try. The promotion of agricultural development is another phase of the official program. The government also looks to the provision of new sources of electric power to facilitate its low-cost use by industry and the con suming public. Other social measures include improvement in housing by means of a program designed to provide resistant and hygienic structures as essential elements in family safety and well-being. Education is recognized as a vital instrument in the improvement of the Puerto Rican community, and the authorities are arvare of the need to enrich cultural life by providing more libraries, museums, parks, beaches, and meeting places as well as recreational and rest centers. A program for the construction of hospitals and public health facili ties is also deemed necessary.

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For the rural population a fundamental requirement is the resettlement of farm families able to count on essential public ser vices. For urban dwellers, water supply and sewage disposal sys tems are requisite, in addition to the other services and facilities mentioned earlier. In summary, we may say that the objective of planning in the broad sense of the word is to see to it that the aspirations of the Puerto Rican people, as expressed by individuals, families, neigh borhoods, towns and cities, are realized in the measure permitted by our island’s resources and potential and in keeping with the social programs sponsored by the government. Economic and Social Relations of the Municipalities For administrative and political purposes Puerto Rico is divided into 76 municipalities whose activities in each case revolve around the town housing the municipal government seat. Urban planning for the development of these towns requires a knowledge of the function of each municipality in relation with those located in the surrounding area, as well as the role it has played and is expected to play in future with respect to Puerto Rico’s economic development in harmony with the social postulates established by government programs. In other words, it is neces sary to ascertain the present and future economic and social relation ships between each municipality and the remaining ones on the island. This brings up the following questions: ]. Are the economic and social activities of certain munici palities predominantly related to a given municipality which is the center of greatest activity? 2. Arc the economic and social activities of a given municipal ity related with those of other, bordering municipalities? 3. Are the economic and social activities of a given munici pality related with those of the capital? 4. Are the economic and social activities of a given munici pality related with those of other municipalities on the island?

Evolution of Economic Development in Different Places

To illustrate the foregoing, I shall take as an example the Municipality of Cabo Rojo, located at the extreme southeastern tip of the island. My choice was dictated by the fact that Cabo Rojo was the birthplace of my colleague, Mr. Ignacio, as well as my own. Another reason was that I recognize that planning demands as accurate a knowledge as possible of what a given municipality was at a specified point in time, what it is at present, and the factors that can influence its future development.

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Economic and social relationships of the Municipality of Cabo Rojo are closely related with Mayagüez, both before and after 1940. Cabo Rojo trade dealings, in terms of purchase of food, construction materials, household goods and clothing, are carried out in Maya güez. In addition, Mayagüez supplies Cabo Rojo with professional, financial, governmental, and transportation services, as well as edu cation and job opportunities. Prior to 1940 San Juan served to a limited degree by way of a financial center and a place providing specialized services, education, public services, and a market for the sale of fish and candy. In a very restricted sense Ponce, the second city of importance in Puerto Rico, rendered financial and public services to Cabo Rojo. San Sebastián was the marketing center for agricultural and livestock produce, and San Germán offered educa tional facilities. Since 1940 Cabo Rojo’s economic and social relationships have continued to revolve around Mayagüez, which also serves as a re creation center. Relations with San Juan have been intensified, to the extent that San Juan now offers recreational services to Cabo Rojo. Relations with Ponce have also become strengthened, and this city now constitutes a specialized trading center. In the case of San Sebastián Cabo Rojo’s relations have remained about the same, and San Germán now provides government as well as the former educational services for Cabo Rojo. In the past Cabo Rojo maintained relations with New York and continues to do so. The rural population of Cabo Rojo that emigrated in greater numbers since 1910 has for the most part chosen New York as its destination, although there has been some demographic displacement to San Juan, Ponce and Mayagüez. As a matter of fact, Mr. Ignacio and I are two emigrants from the town of Cabo Rojo who have moved to the place offering the greatest professional opportunity. Basically, then, we can say that Cabo Rojo is a municipality whose economic and social relationships revolve around Mayagüez as its principal city. Urban planning for the development of the town of Cabo Rojo hinges on whether or not it will continue to be directly related with Mayagüez as has been the case up to now, taking into considera tion the following circumstances: a. Possibilities for the development of a petrochemical in dustrial complex near the city of Ponce. b. Better port facilities at Ponce. c. Construction of the highway from Mayagüez to Ponce. d. Current development trends in Cabo Rojo. e. Cabo Rojo’s potential resources. f. Government policy with respect to the economic, social and physical growth of the island.

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Areas of Economic and Social Influence Granted that Cabo Rojo is closely related with the city of Ma yagüez, the following question is in order: Are other towns as well related economically and socially with Mayagüez ? In this respect we should point out that Mayagüez is a center of commercial, industrial and service activity. Its sphere of eco nomic and social influence extends to various surrounding munici palities. As regards Mayagüez’ future sphere of economic and social influence, we should ask: Will Mayagüez’ sphere of influence remain unchanged in future, considering the possible development of a petrochemical in dustrial complex near Ponce, port facilities at San Juan and Ponce, the construction of the highways from Mayagüez to Aguadilla, the development of a free trade zone, the construction of the highway from Mayagüez to Ponce, present trends in Mayagüez’ development, its potential resources, and government policy with respect to the economic, social and physical growth of the island? If one accepts the existence of a sphere of economic and social influence revolving around Mayagüez, another question arises: Are there other similar spheres of influence in Puerto Rico? We can answer in the affirmative since as many as fourteen such spheres can be identified, which have as their respective hubs: Mayagüez, Aguadilla, Arecibo, Yauco, Ponce, Manati, Vega Baja, Bayamón, San Juan, Guayama, Cayey, Caguas, Humacao and Fajardo. It is also apparent that groups of these are related among themselves, as well as with other areas and with the metropolitan area of San Juan. The interrelated groups form a part of a larger complex, denominated “regions” in Puerto Rico. These were mentioned earlier in Mr. Ignacio’s lecture on regional planning. In connection with planning in Puerto Rico we should ask our selves: Which are the spheres of economic and social influence of the future, taking into account the resources corresponding to each, the development of the petrochemical industrial complex in the south, water resources, development of commercial and industrial ports, potential and resources as related to their possible industrial de velopment, and government decisions of all types? In line with the government’s policy of creating greater wealth and working toward its equitable distribution in the various regions, it is well to evaluate economic development to date in the different areas and formulate economic projections into their respective futures. The foregoing gives rise to still further questions:

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1. 2.

To what extent have the areas developed economically? Has economic development been concentrated in any one of these areas in particular? 3. What factors have contributed to the economic circum stances of the area referred to in point 2, and of the re mainder? 4. What economic development trends are in evidence in the different areas? 5. What intra-area or inter-area migration has taken place? 6. What are the causes and characteristics of that migratory movement? 7. In what way does the economic development of each municipality comprising the area manifest itself. 8. What function is performed by each municipality in the area, and what function it is likely to perform in future? 9. What factors, resources, or other type potential exist or can be stimulated in order to promote the economic de velopment of the less-developed areas? 10. What economic sector in particular in the different areas will determine the course that its future economic devel opment will take? 11. If the industrial sector is the answer, what water resources are available? 12. What ports can be developed for industrial purposes? 13. What ports should be developed for commercial purposes? 14. What is the potential for agricultural development? 15. What is the potential for development of the tourist trade? 16. Considering the trends and potential corresponding to the various areas, what is their future outlook? 17. Does the direction of future development in comparison with the present appear to be advisable? 18. Is there a need to vary the future pattern? 19. What provision has been made for channelizing develop ment into the most advantageous fields? 20. What migratory movements are anticipated within and without the areas? 21. What can the government do to expedite the immediate development of the less-developed areas? The foregoing questions require a certain amount of immediate action, as well as continuing research. Action already being taken in this respect is outlined below': 1. Review of the potential of the prospective industrial com plex that will revolve around the oil refinery in the south.

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Even greater encouragement of the study of resources and potential in other less-developed areas. 3. To determine what projects can be carried out by the government to stimulate economic development in other less-developed areas, such as highway construction, port improvement, and the provision of basic services such as water mains and sewerage. 4. To determine what plans can be instituted in other lessdeveloped areas in relation to government services. 5. To step up research on water resources for industrial and consumer use, insofar as possible. 6. To determine what places are best suited to develop ment as industrial ports. Studies called for in future are as follows: 1. Review of the boundaries of existing economic influence areas, verification of the relationships between areas, and investigation of whether or not they comprise large-scale economic and social complexes. 2. Evaluation of the economic development of the eco nomic influence areas and of the component municipali ties, including an analysis of the contributing factors. This will involve ascertaining what existing or potential factors can be stimulated for purposes of municipal de velopment. 3. A review of the plan covering ports, to include inventory, • changes in operating systems, cargo projections, etc. 4. Review of the plan for industries, leading to an evalua tion of the industrialization program in countrywide terms as well as by municipalities, by areas of economic in fluence, and by the large economic complexes. In ad dition, it will be necessary to continue research on trends or changes that may come about in future in the in dustrial sector. 5. Review of the plan for the development of the tourist trade. 6. Review of the plan for recreational facilities provided by beaches, lakes and forests. 7. Evaluation and projections of the economic development of the various areas or larger complexes. The foregoing studies will enable the formulation of various alternatives regarding Puerto Rico’s probable future in general terms. This will provide the basis for discussion with respect to the pattern of employment in industry, agriculture, the tourist trade and other services. From there we can proceed to estimate the future distribu2.

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tion of urban and rural population among municipalities, areas of economic influence, or larger complexes. Having made a choice as to the most advisable alternative from the standpoint of Puerto Rico’s development, we can then go on to plan the specific rural and urban areas where the population will live, work, and carry out its commercial transactions. Later it will be necessary to study and evaluate programs designed to provide services and facilities for urban communities and rural settlements. These programs include housing, waler sup ply, electricity, roads, schools, school dining rooms, and public telephones. Evaluation and study is also required in the case of other public services and facilities such as penal institutions, sewerage and water mains, hospitals and health centers, airports, electric power plants, housing, education, fire and police stations, courts, public welfare service, and communications

Aspects of urban, planning In a certain sense I seem to have been repeating parts of Mr. Ignacio’s lecture. Please keep in mind, however, that planning for Puerto Rico as a whole as well as in terms of regions and urban areas is all part of a single endeavor that has recourse to various specialized instruments such as studies on economic, social and physical aspects. Planning in Puerto Rico consists of determining by what means certain socio-economic objectives can be achieved, but with the further aim in mind of accomplishing an adequate distribution of production among the various regions of the country. It also in volves social research on the impact produced or that can be produced as a consequence of planned economic development. In Puerto Rico economic, social and physical planning is carried out as a whole. In future the approach will be to undertake more de tailed and belter-directed studies on regions, areas of economic influence, and municipalities, including the rural and urban break down. In summary we can conclude that urban planning will be effected on the basis of more accurate and detailed knowledge re garding prospective economic bases, which in turn are a manifesta tion of the population distribution and employment pattern to be imposed by anticipated industrial and agricultural development in each of the municipalities located on the island.

ECONOMIC PLANNING SEMINAR

October 27 — November 28, 1958

REGIONAL PLANNING IN PUERTO RICO By Rafael Ignacio

Director, Division of Special Studies Planning Board of Puerto Rico

REGIONAL PLANNING IN PUERTO RICO By Rafael Ignacio

Director, Division of Special Studies Planning Board of Puerto Rico In Puerto Rico, as elsewhere, planning has followed special ized lines. Some plans, such as those corresponding to highways and rural communities, are carried out on the basis of an over all plan encompassing the entire island. Others, such as the ones having to do with the future development of the metropolitan area of San Juan and of other cities and towns are related to those areas in particular. Despite being the one traditionally followed, this planning method has a number of faults. Perhaps the most note worthy deficiency is the resultant piece-by-piece or fragmentary integration of an endless number of specialized plans on an island characterized by its dynamic economic development. For purposes of improving the planning procedure, the island has been divided into five major regions and subregions. The primary objective is to obtain a general development plan for each region, to take in three principal areas: 1. The economy, including agriculture, industry, com merce and services. 2. Certain other services on the basis of which economic de velopment can be predicted — ports, waler supply, high ways and electric power. 3. Social facilities required by the population — housing, schools, medical services and recreational facilities. Notwithstanding the problems of concept and performance that always accompany the preparation of regulatory plans covering the different types of development in the five regions involved, it is felt that the advantages derived from this integrated regional plan ning method justify any amount of effort. From a general point of view, the social and economic implications of present trends can he analyzed and evaluated more effectively, as can the relative cost and advantages of possible alternatives. Furthermore, the existence of a thorough-going regulatory plan for each of the regions and subregions will facilitate decision-making on the part of the various Commonwealth agencies and departments with respect to the localiza tion and magnitude of given projects.

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I. Nature and Purpose of Regional Planning Regional planning, as it is being carried out in Puerto Rico, may be described as an effort to achieve a logical pattern of de velopment for each of the five regions, including the three general fields outlined a bit earlier; i.e., the economy, certain public ser vices, and social facilities. The purpose of regional planning is to provide better guidance in two general spheres: 1. The review, evaluation and integration of all existing specialized plans, and the preparation and integration of those that need to be developed. 2. Decisions made with respect to given programs, projects and proposals aimed at implementing the different plans. “Specialized plans” as used here consist of two types: 1. Commonwealth plans for particular or special functions, such as agricultural development, industrial development, highways, etc. 2. Plans for specific areas such as the metropolitan area of San Juan, or any of the remaining towns and cities. To have undertaken this type of integral planning on a re gional basis could be considered the next logical step in the evolu tion of planning in Puerto Rico. Planning as we now know' it came into being in the year 19'12 as a result of the Planning Act. The years following were devoted to the work of organization and investigation, particularly in the field of physical planning. Zoning and lot distribution regulations were drawm up. Regulatory plans were formulated covering highways and rural housing construction projects, and the procedure was devised for the review of public works. Other necessary work con nected with the preparation of regulatory plans was also carried out, including: compilation of all available information and statistics, the preparation of the topographical map drawn to different scales, official maps, defining the boundaries of the 77 municipalities and 800 rural and urban subdivisions on the island. The end of the war and the subsequent encouragement of economic development brought about an obvious increase in the work load with respect to economic planning. To meet the new needs, the functions of the Planning Board were broadened. Work with respect to urban planning was also intensified considerably. Owing to the very substantial achievements to date in the total development of our activities, the Planning Board today is facing an ever-increasing responsibility for offering guidance and making decisions with respect to the appropriate methods for conducting physical as well as economic planning. Existing specialized plans,

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which were prepared as a reflection of the needs, concepts and as sumptions prevailing on a given date, require adequate revision and coordination. In instances where they do not yet exist, new plans must be prepared for certain activities and functions. Therefore, we entertain the hope that through regional plan ning we can develop an improved perspective and a better opera tional framework which will permit us to direct our activities toward the achievement of a general improvement in our own work as well as in that of the remaining Commonwealth departments and agencies. The point of departure for the development of regional plan ning consists of building a general picture on the outlook for popula tion growth and total economic development, which is subsequently broken down into the various regional components. As outlined earlier in past meetings of this Seminar, almost all the work con nected with preparing general projections for the island as a whole, and by regions, has already been completed by the Planning Board. In the light of the economic development anticipated for the year 1975, the Planning Board has been obliged to move in the direction of emphasis on regional planning. The nature and mag nitude of the changes that are likely to take place in our economic structure imply not only new and complex requirements, but also a continuous and profound process of transformation in our way of life. From a situation in which from 10% to 15% of our labor force is unemployed and ■where half of the remainder are occupied — many only seasonally — in agriculture or other pursuits in directly supported by agriculture, we are moving toward a situa tion in which two-thirds of the larger and better-paid labor force will be employed in industrial occupations or in jobs indirectly provided by the manufacturing industry. This dramatic transformation has certain obvious implications for regional planning. In the first place, our industrialization ex perience up to now tends to corroborate experience gained else where: namely, that the majority of industries prefer to locate in or near urban areas. Secondly, although many employees, en trepreneurs and other persons associated with industry continue to live in rural areas and travel to and from their places of work, the majority of these individuals both here and in other countries choose to move near their jobs. In short, even after the total popula tion is stabilized, internal migration will continue and occasion the corresponding demographic growth in urban areas and consequent reduction in the rural population. This continuous migration will undoubtedly give rise to difficult problems in point of planning and program scheduling. Numerous facilities and services must be provided in the urban areas. At

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the same time, in view of the constant emphasis on agricultural de velopment, we will have to continue to furnish the necessary facili ties and services for our rural regions. Hence the more we investigate patterns of change in urban growth and the consequent reduction in rural population, and the more we discover regarding the requirements, costs and benefits of developing alternative regional plans, the more successful we will be in scheduling the distribution of our resources.

II. Regional Integration of Specialized Plans The type of regional planning we are endeavoring to develop here in Puerto Rico can be summarized briefly as follows: Starting with the establishment of regional boundaries, we are proceeding to prepare projections on regional economic development and on po pulation growth, on the basis of present trends. Once these projections are completed, their implications will be analyzed from the social as well as engineering and cost stand points. Guided by the results of that analysis, it will be possible to consider alternative development patterns together with the im plications of each. As a result of this process we may expect a general development pattern to emerge which will represent a satis factory adjustment to both social and economic needs. This final pattern, in turn, will become a general frame of reference for various purposes: i.e., corroborating existing specialized plans or making whatever revisions may be necessary therein, preparing new plans in cases where no specialized program yet exist, and serving as a decision-making guide in connection with specific projects.

Regional Boundaries An infinite number of factors must be taken into considera tion when setting regional boundaries for purposes of planning. Regions devoted to special purposes (for example, the development of agricultural programs or hydroelectric projects) not only overlap but seldom coincide with the political subdivisions which serve as the basis for obtaining almost all existing statistical data. In the light of these circumstances. Puerto Rico was divided into regions that follow certain municipal boundary lines. Each of these re gions is dominated by a principal urban center where functions appropriate to a city are carried out, such as commercial inter change, manufacturing, and shipping. However, each is different from the rest and therefore there is a complete lack of uniformity in the resultant demands on regional planning. Eventually it was decided to divide Puerto Rico into three major regions, and subdivide one of these into another three. In establishing the boundaries for these regions, the first step was to examine the administrative subdivisions set up as part of

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the operations of the various Commonwealth agencies. It was found that many of the lines of demarcation were common to all the agencies, and although quite a few differences were observed, numerous administrative boundary lines did coincide in the mat ter of political subdivisions. Those that were common to the greatest number of agencies were chosen for purposes of regional delineation. Other methods were used to resolve the cases in which the boundary lines did not agree. Knowledge of the extent of the areas of commercial influence of the principal ports also aided in determining the coverage of the. various planning regions. The study on internal transportation by highway shed further light on the problem. The 1956 traffic flow map offered guidance on the relative density of trafic over the various principal and secondary highways on the island. A line joining the points of least flow, adjusted to municipality boundary lines, was likewise helpful when outlining the various regional limits. The resulting regional subdivisions place more emphasis on accidental differences than on economic similarity. From the outset it was recognized that any multiple-purpose region, whatever the selection method used, would have to be considered flexible for the practical purposes of planning. The eventual recommendations covering various specific development programs undoubtedly will call for the creation of an infinite number of special regions, many of which will extend beyond the regional boundaries fixed to date. Integral planning on the basis of said regions undoubtedly will do a better job than specialized planning in clarifying and defining the complex economic and social problems and the political relationships between urban centers and their respective rural areas. Regional Projections on Economic and Population Growth

As indicated earlier, the point of departure in regional plan ning consists of projections covering economic growth and the number and geographic distribution of regional populations, under the as sumption that trends observed up to the present will continue. In formulating such projections we are using the national income method which involves a study of past trends and the formulation of the corresponding projections on total net income, employment, productivity, the labor force, and the population, for specific periods. We have enough information to be able to present a collective statement by regions, including the following economic activities for the years 1949 to 1956: agriculture, manufacturing and mining, construction, transportation and other public services, retail trade, wholesale trade, real estate, services, and government. For certain

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of these sectors income can be estimated by direct reference to census data. For others, it is necessary to resort to regional dis tribution on an estimative basis. By using this income projection method it becomes possible to project the breakdown of family income by regions. This breakdown, in turn, serves any number of purposes. For example, the detailed formulation of consumption estimates assists in the improvement of general economic projections. Such estimates are also helpful in calculating, water and electric power needs, traffic flow, number of automotive vehicles, housing, etc. Later on the regional economic trends for the period 19491956 will be projected to 1975, including estimates corresponding to the years 1960, 1965, and 1970. From these projections on ag gregate net income, employment and productivity the future re gional pattern will be derived with respect to the labor force and population. Here the assumption will be made that in the majority of cases people will tend to move in the direction of their places of work.

The Integration Process Regional projections on economic growth and the population represent the beginning of regional planning. When completed, they will be evaluated from various points of view; and. if neces sary, several alternatives will be considered and evaluated in the same manner before the final model is prepared that will be used in the formulation and integration of the physical as well as eco nomic aspects of the specialized plans. The criteria to be followed in these evaluations will be social as well as economic. Admittedly, evaluation from a social point of view will be more difficult; however, any development program of the magnitude of the one under way in Puerto Rico necessari ly involves changes in values, in family relationships, in community organization, etc. In the process of solving old problems we create new ones. Recognizing this fact, the Planning Board recentlv created a unit for social analysis which, among other things, will attempt to clarify the various types of objectives or of human values, as well as the impact thereon of government planning. Another, more specific socio-economic problem arises from the growth of the metropolitan area of San Juan in relation to the rest of the island. The marked increase in growth and development experienced by metropolitan areas constitutes a universal phenom enon, and here, as elsewhere, has occasioned concern and study in recent years. We trust that our studies will assist in clarifying the situation since they will provide better bases for judgement with respect to: 1. The possible future consequences of present trends.

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Possible alternatives. The cost and benefits of the alternatives as compared to the cost and benefits if events were permitted to follow their normal course freely. We feel that evolution from an economic point of view will be made easier by virtue of being more accurately defined. On this point we anticipate that the principal contribution of regional planning will be the evaluation of needs and costs not only in unit terms, but also taken as a whole. To illustrate: There is a possibility that the supply of water may constitute a limiting factor- in the development of a certain part of the island where other basic facilities, such as good ports, for example, do exist. On the other hand there may be instances where water supply facilities are no problem, but there are absolute ly no port facilities, or existing ones do not come up to standard. Which course would be the most advisable: to supply water to the areas endowed with good port facilities, or to improve port instal lations in regions where water supply is abundant? These considera tions should be analyzed in the light of other aspects, as for exam ple, the availability of materials and the comparative costs in the two places for the development of industrial areas, housing, high ways, etc. As you will have observed, regional planning offers us an oper ations framework in which the general panorama is constantly taken into consideration. Each time that a change is contemplated in any of the aspects of a given plan, adjustments can be made to the remaining aspects of that plan and of other plans where neces sary, and equivalent changes can be effected in other regional plans corresponding to the remaining regions in the country. Once the above described procedure is completed, a general model of future development can be prepared for each region that can be utilized by all departments and agencies in the develop ment and preparation of their respective regulatory plans and proj ects. Therefore, the work of integration will be simplified in terms of localization, and spatial amount and distribution, since all those departments anil agencies will be working from the same base data. 2. 3.

Conceptual and Operating Problems A serious conceptual problem inherent in planning in general frather than being limited to regional planning) has to do with the budget covering capital improvement projects. What assump tions should be used with respect to future investment in public works? Should investments be projected into the future along “normal” lines, or should they be projected so as to satisfy an ticipated needs at a given moment? In Puerto Rico the first al ternative has the advantage that expenditures can be held with

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in the existing budgetary and borrowing limits. It has the dis advantage that the limitation in planned facilities may become a serious obstacle in the path of economic development. On the other hand, projecting capital investments on the basis of satisfying fu ture needs would make it necessary to amend the Constitution and would imply the imposition of new methods for financing the step ped-up spending. Another conceptual problem arises from the lack of adequate information in many areas. While this information is being ob tained, some sort of orientation or guide is needed for decision making involving the annual investment of huge amounts of public as well as private funds in an infinite number of different pro grams. How far can we go in formulating regulatory plans for purposes of orientation and guidance when adequate information is not available in many of the most important areas? In point of operations, the principal problem is: Where does the jurisdiction of the Planning Board end and the functions of the operational agencies begin? Many of the operations departments and agencies have their own planning office, and others will have in future. We cannot and should not duplicate their efforts. Quite the contrary: we should work in coordination with them and harmonize inter-agency relationships. At present we are trying to solve operational problems by means of an inter-agency technical committee, one of whose principal objectives is to assist in evaluat ing the above described economic and population projections. Closely linked to the question of inter-agency integration is the problem of determining in what degree of detail an all-encompass ing over-all plan should be provided, in comparison with the various specialized plans. On this point our present position is that the general plan should be limited to short resumes on the projections that affect the various specialized plans, emphasizing their inter relation. Fuller details should be offered in the reports on the specialized plans, to be prepared by the respective agencies. In any event, when completed the regional plan should satisfy an infinite number of criteria. From the point of view of each region, the plan should contain proposals that are internally con sistent and feasible, and adjusted to the needs and resources of the specific, region involved. From the point of view of the island as a whole, the sum of the regional development patterns should be in harmony with anticipated population and economic develop ment covering all of Puerto Rico, including the financial capacity of the Commonwealth government. At the same time, each of the regional plans, taken separately, should harmonize with the func tional requirements demanded by the economic sector to which they belong.

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Regional Plans in Execution

In including this essay on the regional planning work per formed by the Planning Board of Puerto Rico, I believe it would be a good idea to offer a brief resume of the Board’s powers in enforcing its ¡dans. It might be said that the economic and social development of the island is not the job of the Planning Board in particular, but constitutes a task assigned to the entire Commonwealth and its agencies. The Commonwealth government has for that reason de veloped a variety of agencies and programs to look to economic and social development: namely; for industrial and commercial devel opment it has created the Economic Development Administration and the Industrial Development Company, as well as the Govern ment Development Bank. For agricultural development there is an endless variety of agencies: the Department of Agriculture, the Land Authority, the Experimental Station, the Agricultural Exten sion Service, etc., as well as a number of federal agencies that operate on the island. Further, to coordinate the operations of these different agencies, the Agricultural Council was created. The government also enjoys a considerable amount of power with respect to service programs. Fields such as education, health, and highways, are state functions, either wholly or in part. In Puerto Rico public corporations provide water and electric power facilities, and communications are also controlled — although in limited degree — by a public corporation. A vast program of urban renovation and housing construction is also in process, as well as an ambitious program for the development of rural communities. The latter is tied in with a mutual-aid program designed to provide low-cost housing facilities on cooperative-movement-type bases. For its part, the Planning Board has a great deal to do with giving form to, channelizing, and coordinating all these activities. In recognition of its centralizing function, the Board forms a part of the Governor’s Office, and the Board President is a Cabinet member. Among its tools and administrative reosurces for the enforcement of regulatory plans, the following merit special men tion: the Annual Economic Report; the Six-Year Economic Pro gram; the preparation of regulatory plans and official maps, proj ect review, and the exercise of police powers through regulations covering zoning, lot distribution, and building construction.

The Economic Report,

The annual Economic Report to the Governor probably rep resents the most general application of planning enforcement. In this report the economy is explored in its entirety, from the point of view of its behavior in recent years and the forces that tend

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to influence it with respect to its future development. These future developments are translated into projections for the next two or three decades, with ample details being offered for the period im mediately following. These projections, in turn, are related to already-defined objectives in order thus to be able to offer guidance with respect to action to be taken with a view to achiev ing the final objective within a given period of time. Items such as the necessary formation of capital are analyzed for the private as well as public sectors. Incentives which the government can use to encourage and channelize development in the private sector are reviewed and analyzed, and recomendations are offered with respect to any changes that are in order. The problem of achieving the necessary capital formation in the public sector is reviewed in the light of economic and other resources that the government is expected to be able to bring to bear on the problem. A preliminary draft of the report is prepared in the sum mer of each year for the use of the Governor and the agency di rectors, in connection with the preparation of their respective budget requests. The final report is completed at the end of the calendar year and is sent by the Governor to the Legislature, together with the Model Budget and the Six-Year Economic Program. The Six-Year Economic Program

The Six-Year Economic Program gives a cost and priority summary of the planned execution of numerous programs during the next six-year period. On the basis of this document we can determine the performance costs corresponding to the different pro grams scheduled for development in future. Since the amount of economic resources ordinarily called for by the various programs tends to be greater than the resources available to the government, the Six-Ycar Economic Program provides a strategic base for deci sion-making with respect to the relative speed with which given programs should be realized. In short, the Six-Ycar Economic Pro gram is an instrument for enforcement in the sense that it forces decisions with respect to the distribution of available economic resources for the execution of the various programs. Recommenda tions appearing for the first year of the Six-Ycar Economic Program become a part of the recommendations made by the Governor to the Legislature through the Model Budget.

Regulatory Plans In practice, the term “Regulatory Plan5’ is legal in nature since such plans have been duly passed by the Planning Board after holding the corresponding public hearings, have been recomended to the Governor for his approval, and finally, have been approved by him. Once this process has been completed, the regulatory plan

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has in effect the force of law, and public as well as private sector action must conform to the details contained therein. As previously indicated, regulatory plans may be one of two different types. One of these comprises the plans for the basic func tions inherently falling to the State, such as industrial and agricul tural development, highways, schools, etc. These plans are of particular importance for those agencies and individuals who have some direct connection with the development of the activities in volved. The other type are plans that cover all manner of activities within a specifically defined local area — ordinarily an urban zone. This type of program is especially useful for public and private ex ecutives, as well as for groups of citizens interested in the develop ment of some area in particular. Due to the complexity of the subject matter involved, together with the time required for its preparation, reproduction, presenta tion, acceptance, approval and ratification, and the need for sub sequent review and improvement, the Planning Board has made use of flexible mechanisms such as Development Models and Schematic and Preliminary Regulatory Plans. These do not have to go through the entire process and therefore speed up the planning processes without the need of awaiting the final refinement of the plan. This is the most practical operating method since regulatory plans are continually undergoing change. Project Review

In addition to being conceived at the outset as parts of an over-all plan, the prosposed public projects are submitted in at least two instances to review by the Planning Board before con struction begins. In the first place, they are gone over at the time the Six-Year Economic Program is prepared. Secondly, the plans and specifications for all public projects must be approved by the Planning Board before the agency concerned is authorized to proceed to their execution.

Regulations Control over the private sector of the economy in such way that its activities will follow the lines established by the regulatory plans is taken care of for the most part within the limits of established regulations. This regulatory action is made possible through the authority for police functions conferred on the Board. Various of the mechanisms used in this connection arc as follows: 1. The Official Map 2. Zoning Regulations 3. Lot Distribution Regulations

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Building Regulations Authorization of construction permits and building use licenses.

Local Planning

Finally, mention should be made of the work of the local planning commissions in the planning process in Puerto Rico. As might be expected, given the circumstances of its historic develop ment, Puerto Rico has no tradition of powerful local governments. Therefore, the central government has been obliged to assume the greater part of the initiative in the socio-economic development of the island as a whole. However, it is the intention of the Com monwealth that local governments lake on a progressively greater responsibility in planning their future development. This altitude is reflected in the provisions of the Planning Law of Puerto Rico. In recent years more than 60 commissions have been organized. Although their functions at present are only advisory, it is antici pated that they will be in a position to assume greater responsibil ity in future.

ECONOMIC PLANNING SEMINAR October 27 — November 28, 1958

OPERATING EXPENDITURE BUDGET OF THE GOVERNMENT OF THE COMMONWEALTH OF

PUERTO RICO By Manuel Salavarria

Budget Bureau

OPERATING EXPENDITURE BUDGET OF THE GOVERNMENT OF THE COMMONWEALTH OF PUERTO RICO By Manuel Salavarria

Budget Bureau

Introduction

Before taking up my topic for discussion as such, I should like to explain its scope: This lecture will treat principally of the organization, techniques in use, achievements, and problems en countered in respect to the allocation of funds for operating ex penditures of the Government of the Commonwealth of Puerto Rico. The paper refers to the central government budget and there fore does not cover the budgets of public corporations or municipal ities. The central government renders services typical of public administration, such as education, highway maintenance, protection of life and property, public health conservation, etc., that are paid for principally out of taxes. Other lecturers in this seminar have taken up in detail estimates of financial resources as well as a discussion of capital investment programs. Nevertheless, it will be necessary at times to point out important relationships between the operating budget and other aspects of the budgetary system with which the former is very closely connected. Planning and the budget Planning consists of processes and mechanisms for defining objectives and goals for government endeavor, studying and measur ing the magnitude of the problems that the government should take care of, and developing programs of action to achieve official ob jectives with the greatest efficiency. The annual budget — a plan ning tool — is intimately connected in a good planning system with the elements of long-term program scheduling. The budget deals with a specific year and must cope with the problems of the moment; however, in doing so, it rests on a broader time base and in this way contributes to the achievement of the government’s long-term objectives. For a country that is insufficiently developed economically but determined to bring about a rapid rise in the standards of living,

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the budgetary system is vital. Its financial resources are very limited, at the same time that tremendous effort is required on the part of the government. The struggle between multiple public pro grams to obtain a maximum share of resources is intense, which increases the need to assure the wisest distribution possible of avail able financial means. In the final analysis, the budgetary system is at the service of the people’s well-being, and therefore any im provement incorporated in it enhances the probabilities of fostering that well-being. In many respects the budget is a reflection of economic policy In the process of formulating and adopting the expenditure plan many types of data must be taken into account, such as the rela tion between total government expenditure and the total expenditures of the entire economy, the relation between the government’s total expenditures and its current revenues, the relative contribution of the various sources of income to the government’s total financial resources, the relative magnitude of government expenditures for different purposes, and the proportion of allocations for economic development programs and those earmarked for social services. Organization, processes, techniques The administrative reform A program of economic and social development requires governmental organization and processes that will facilitate and channel its progress. It is significant that when the development program for Puerto Rico was initiated, the government started a movement for administrative reform that, among other aspects, took in the civil service system, fiscal administration, the organizational structure of the various departments and agencies, and the machinery for planning and the budget. The Planning Board and the Budget Bureau were created in 1912; the economic development program dates back to 19-11. The Planning Board’s duties are: to provide periodical in formation on the economic situation and current trends, to make recommendations on economic policy, to analyze disbursements proposed for the various government programs — principally those involving permanent capital improvements, in terms of established fiscal policy and available resources — and to coordinate and guide the development of urban zones. The Budget Bureau advises the Governor on fiscal policy and administration and assists him in preparing the annual budget, following the course of the operations of the different agencies, and improving the organization and administrative systems of the Executive branch. Since they constitute institutional auxiliaries of the Chief Executive, these two agencies form a part of the Governor's Office. The basic mission of agencies of this type is that of aiding in the coordination, in tegration and guidance of governmental activities.

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The budgetary process In the government of Puerto Rico the budgetary process flows in two directions. One is primarily concerned with disbursements proposed for permanent public works projects; the other deals with operating expenditures. The process of formulating the operating expense budget for a fiscal year begins in the month of August of the previous year. or eleven months prior to the beginning of the fiscal year for which the budget is being prepared. The Governor sets up the. general policy to guide budget formulation and makes it known to the various governmental organizations. At the same time the Budget Bureau sends specific forms and instructions to the agencies for their use in preparing, and submitting information on, their work programs and the funds they estimate they will be needing. During the month of September the Budget Bureau begins to receive the budget estimates from the smaller agencies and sets out to study and evaluate them. Meetings are also held at this time with the agency chiefs for purposes of discussing the individual budget requests. During the first stage of the process, the Planning Board submits the Mid-Year Economic Report to the Governor. This document includes information on the economic conditions prevail ing in the Commonwealth and in the United States for the fiscal year just past and discusses the outlook for the current fiscal period. The Report also presents long-term projections of the analysis, ap praises progress in connection with economic development programs. and makes recommendations for government action. The document is discussed in meetings with the Governor and other officials, and the final outcome is the formulation of general policy. About the middle of October the Secretary of Finance prepares the preliminary forecasts on government revenues. Early in De cember he prepares the final estimate that will serve as the basis for presenting the budget proposal. Together with its recommendations, the Budget Bureau sends the Governor a series of reports on the work plans submitted by the various agencies, as well as their requests for funds. These are taken up with the Governor in meetings attended by the Budget Director and other Bureau representatives. After the Governor has reached a decision on the allotment requests, work begins on the preparation of the document that will be sent to the legislative as sembly, along with recommendations on the government’s plan of expenditures and receipts: the Model Budget. Almost in parallel fashion to the process followed by the Budget Bureau, the Planning Board adheres to a similar procedure i;i prepar ing its Six-Year Economic Program. However, the latter concentrates

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its efforts on evaluating and recommending appropriations for public works projects and for non-recurrent operating expenses. The Board also holds hearings with the agencies in order to talk over their proposals and prepare a preliminary program for discus sion with the Governor. Preliminary program discussions are at tended by the President of the Planning Board, the Budget Director, the Secretary of Finance and the Secretary of State, and these meetings take up the estimated revenues prepared by the Secretary of Finance as well as any prospective bond issues that may be necessary. However, the Model Budget is the official document by means of which the Governor fulfills his constitutional obligation of presenting proposed expenditures covering the next fiscal year to the legislature. This document contains the Governor’s recommenda tions on operating expenditures as well as permanent public works and is submitted to the legislative assembly when that body meets in ordinary session in January of each year. The budget submitted by the Governor is subject to detailed review by the finance committees of the Congress before being finally approved by both houses. The Director and other rep resentatives of the Budget Bureau, as well as department and agency chiefs, appear before the commission of each house in order to justify budgetary recommendations. The legislature is empowered to approve appropriations. ft studies and revises the expenditure and income program submitted by the Governor, takes action on laws governing the corresponding appropriations, and when necessary makes provision for additional sources of income. Appreciations projects approved by the legislature are subject to the Governor’s veto. The Chief Executive also is empowered to eliminate or reduce items fixed in appropriations laws covering more than one budget item. At the end of the fiscal year prior to the one for which the budget was drawn up, the Governor comes to a decision on the projects approved by the legislature. I should clarify the point that the process of formulating and approving the budget is much more elaborate than my descrip tion would indicate. Certain steps not directly related to the topic of this lecture were omitted. Furthermore, the budgetary cycle extends to the phase of budget performance, and in that respect also the central planning agencies have important responsibilities in connection with lending assistance to government agencies in the fulfillment of legislative and administrative ridings. To complete and clarify the picture of the distribution of budgetary responsibility in the government the following observa tions should be helpful:

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1. The Governor’s responsibility as regards budget prepara tion is clearly established. This is an important fact from the point of view of planning since it permits the production of the integrated and coordinated plan that is essential for effective planning. 2. The organization for formulating the budget not only has a horizontal dimension at the center, but also a vertical dimension extending all the way from the different agencies to the Chief Ex ecutive and his advisors: The process begins at the lower levels of the agencies responsible for carrying out the programs and continues on up the different steps in the official hierarchy. In the measure that one goes higher on the scale the problem considered and the decisions made are increasingly comprehensive. 3. The allocation of scant financial resources among the dif ferent programs — the essence of the budgetary task, — is basical ly founded on a comparison between the relative social benefits and costs of the various activities laying claim to the funds. The social benefit of a government service is the satisfaction that the mem bers of the community receive as a result of the service rendered, and takes in not only the direct but also the indirect benefits thereof. The social cost is the sacrifice made by the society when the resources are devoted for one purpose instead of another. The most rational distribution of financial resources demands that they be allocated preferably to programs affording the greatest benefits as related to their costs. However, the process of compar ing benefits and costs is beset by many difficulties: often it is dif ficult to arrive at even an approximate estimate of the benefits; on other occasions they cannot be expressed in comparable terms. In the budgetary process just described elements of organiza tion and procedure can be discerned which contribute to facilitating a comparison between benefits and costs. For example, budgetary requests originate in the operating agencies themselves. They are in a better position to determine the direct benefits that the proposed activities will be likely to produce. Logically, however, they are not in the best position to establish comparisons between the benefits and costs of the different programs. Comparisons of this type arc made at the level of the Chief Executive with the assistance of agencies such as the Budget Bureau and the Planning Board. and at the level of the legislature with the central participation of the finance committee. 4. Apart from the Budget Bureau and the Planning Board the sphere of fiscal administration includes the Department of Finance (the agency which in addition to being responsible for the collection, custody and disbursement of public funds advises the Governor on tax policy and public debt) and the Government De velopment Bank (a public corporation which among other functions

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gives counsel to the government on matters related with the financ ing of public activities through the use of the borrowing capacity or margin of the Commonwealth). The necessary coordination in the field is obtained through mechanisms such as the meetings mentioned in the foregoing description, constant cooperation in the daily task, and the Financial Council (a body created in 1956 to render abvisory services to the Governor and composed of the chiefs of agencies directly concerned with the government’s fiscal administration, in addition to a few’ private citizens).

System of Public Expenditure Priorities

One of the concepts utilized by our government in the present decade to assist in a more effective allocation of our scant financial resources is that of priorities. Governor Muñoz Marin’s message to the Congress in February, 1950, was devoted exclusively to the theme of priorities. To win “the production battle.” the honorable Governor pointed out in that message that among other things there was a need for a “firm and austere determination to maintain a concept of priorities with respect to the multiple things that we want to do and must do so that this people may have a belter life.” Sometime later (January, 1951) the report submitted Io the Governor by the Economics Division of the Planning Board fully discussed the need of adopting a specific system of priorities. The government no longer could count on the abundant resources that during the war and post-war periods had enabled it to provide capital for public agencies and thus strongly encourage the de velopment of the economy. It was therefore imperative to adopt and follow an order of priorities in the allocation of available funds. In the same report the Board recommended a specific system of priorities for the six-year fiscal period from 1951 to 1956. In brief. the priorities system recommended (and basically adopted by the government) recognized that the principal economic need was to in vest in the functions that were essential to increased production. The priorities concept necessarily implies recognition of the fact that a specific order of such priorities depends on the general objectives of the community and the prevailing economic and social circumstances; hence, they must be revised any time these de termining factors undergo substantial change. The establishment of a system of this type, although it as sists in distributing the funds among the many programs that require attention, does not solve the problem of how much to assign to each service at a given moment. The budgetary mechanism must continually seek balance between these services, including the balance that is so fundamental for a country in process of rapid development: balance between investment to expand production, and

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expenditure on social services that do not directly serve that ex pansion purpose.

Goals and Projections Another tool in use for planning and administration is the formulation of specific program goals. In addition to the goals pertaining to the entire economic development effort (in terms of family income), the objectives of the programs for industrializa tion, education and agricultural development, among others, have been expressed in the form of specific goals tied to given periods of time. In the case of the educational program, for example, the 195-1 budget message indicated that: “One of the fundamental objectives of this government is to provide primary instruction as soon as possible. . . for all children from 6 to 12 years of age in Puerto Rico. . . The specific goal... is to provide primary school facilities for 91% of the children within that age group. The plan is aimed at achieving this goal by the year 1956-57. It is expected that by that lime it will also be possible to provide facilities for 75% of the children from 13 to 15 years of age, who normally are in junior high school, and for 41% of the 16-18-year-old popula tion that ordinarily is in high school.” (’) It is worthwhile to note in passing that these goals w’ere surpas sed. We mention them here by way of an example of the use of goals in government. One might think in terms of a hierarchy of goals. Those at the top correspond to the very broad sectors of governmental activity. Such would be the goal established for the entire eco nomic development endeavor in Puerto Rico. Within the frame work of this general goal there are others in connection with lesser phases of government activity that nonetheless form a part of a broader governmental sector. This class is typified by the goals set for the industrial development program. The establishment of specific goals helps to clarify the course of action and guide the various activities; further, it is of great assistance in program evaluation. When the objectives of the pro gram are conceived in very general terms evaluation is extremely difficult and the planning process is consequently w’eakened. In the presence of established goals, a large part of the ques tions formulated during the budgetary process make reference to them. What progress has been achieved to date? How does the •Model Budget of the Commonwealth of Puerto Rico for the fiscal year 1953-54, p. IX.

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proposed budget contribute to their accomplishment? What prob lems have been encountered in the course of striving toward such goals? Another planning tool which helps place the budget on a long term plan consists of projections of trends. Goals are established at long term, whereas the annual budget covers a short-term plan. Projections aid in answering question such as: If present trends continue, and given current standards, where will we be by a certain future date? How does this prediction compare with the goals set? What financial efforts should be put forth during the next fiscal year in the light of these data? I should mention that not all programs in our system are equipped with such specific goals, nor do they have recourse to the types of projections outlined above. These tools are used to the greatest extent in connection with economic development programs; however, they must be employed in increasing degree in future. Certain participants in, and observers of, the planning process have pointed out that social development programs call for a joint analysis similar to that furnished by the Economic Report to the Governor with respect to the economic development programs. Al present the agencies in charge of these social development programs prepare annual reports and other performance reports during the year, but there is no over-all report to bring them together and thus present a complete picture of progress in the field. Further more, many of the reports on the activities of the operating agencies do not present information on the influence exerted by their pro grams on the situation or problem they wen- designed to solve. Work is going forward at present to remedy the above situa tion. The Planning Board is in the initial stage of preparing what might be called a “Social Report," to provide an over-all picture of social problems and the government programs charged with look ing to these social needs. As a part of this project, the Board has begun to develop projections covering government program “customers” or users, on the basic of factors such as the following: (1) principal program functions, and changes anticipated at long term; (2) population sector toward which these functions are directed; (3) standards governing “customer” selection; (4) service standards. The analysis is to include historic data up to the present on each of those factors and the probable long-term changes. It is anticipated that this type of analysis will assist in problem identification well in advance and in determining the demand for service which must be met in future. The Budget Bureau has been endeavoring mightily to institute a system of reports that would provide it with periodic informa-

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tion from official agencies.. The Bureau’s plan would be to study, summarize, and coordinate these reports and submit them to the Governor with its comments. Classijicalion systems The quality of the decisions made in the budgetary process depends not only on the nature of the base information but also on the way in which income and expenditure information is organized, grouped and classified. Classification systems are the molds into which the information is poured and in large measure determine the types of questions that arise and the types of answers and decisions that will result from the budgetary process. The usefulness of a system depends in part on the administrative level at which it is employed and the nature of the decisions for which it will serve as the base. There are certain traditional classification methods: classifica tion on the basis of organization units, and classification on the basis of purpose of the expenditure (services purchased). These have been in use in our budget system for quite some time. However, immediately after the government launched its economic and social development program, the need arose for a more general type of classification that would aid in the formulation of over all policy. Thus the functional classification was originated, which groups expenditures in terms of the general purposes sought by the government. One of the advantages offered by a classification plan of this type is that it permits a constant evaluation of the degree to which decisions conform to the system of priorities adopted. The budget message submitted by the Governor to the legislature, and to which he annexes the proposed revenue and ex penditure program, is based on the functional classification of expenditures. This classification is also used in the Model Budget Summary, a simple pamphlet directed to the average citizen, thus demonstrating that by reason of simplicity the system is also useful for informing the man in the street. The major functional classifications in our system are: General Administration Protection of Life and Property Health Conservation Public Welfare Education Industrial Development Development of Agricultural Resources External Transportation Internal Transportation and Communications Worker-Employer Relations

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Recreation and Parks Pensions and other social security programs Debt amortization These functional groups are in turn divided into classes and subclasses that make it possible to present more detailed informa tion when necessary. Another classification criterion which has begun to be adopted gradually in our budgetary process is the classification of ex penditures by programs. Aware that the traditional classification on the basis of services purchased (purposes of expenditures) does not lend itself to concentrating attention on the objectives, volume, and quality of the services involved, we have been endeavoring to adopt the program or activity as the unit of presentation of data for each agency. However, a great deal remains to be done: In many cases the measurement relating the total cost of the program with the work load of the activity —■ i.e., unit cost — is not available. The budget of the Health Department represents the most thorough effort in this direction. In recent years that agency has been making use of a system of budgets and administrative reports by programs, in which the costs of the various programs and activi ties are not only identified but expressed in terms of units that at the same lime serve to measure the work load; and standards have been developed for evaluating the services rendered. The concept of a common unit of measure covering work load and cost is of obvious utility for fiscal planning: it facilitates the formulation of the plan of action for the program or activity and per mits its incorporation into the more general goals set for government endeavor. Moreover, it is easier to evaluate operational results since they can be compared with the accomplishment originally projected. Given the increasing complexity of government functions which makes it progressively more difficult to obtain an over-all picture, it become imperative to use classification systems such as the ones mentioned in order' to build the framework that is so essential to decision-making. This section has referred only to information on expenditures. Other lectures in this seminar have taken up different types of data, for the most part of a statistical and economic nature, and including information on the output and income of the economy. This information is used in various phases of the budgetary process not only in connection with the expenditure program, but also when considering financial resources. Development of the Operating Expenditure Budget

Before discussing the operating expenditure budget and its trends, some comment is in order regarding its relationship with

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the capital expenditures budget. One of the most important eco nomic responsibilities of a government committed to a rapid de velopment program is to channelize investments toward the most productive ends. The process of formulating the Six-Year Eco nomic Program, which leads to the capital budget, facilitates fulfill ment of the foregoing responsibility. The capital budget markedly reflects the economic development effort: As a matter of fact, many of the more important investments show up in the capital budget but have no direct impact on the operating expenditure budget. This is the case, for example of contributions to public corporations for the construction of facilities essential to economic progress. Another type of investment — schools, hospitals, etc. —- originally appear in the capital budget and later affect the operat ing expense budget in the form of operating costs occasioned by such facilities. Further, when the investments are financed by means of borrowings, payments on interest and principal are defrayed out of the operating expenditure budget.

The operating expenditure budget essentially reflects the level of production of “social goods,” that is, the production of services that benefit the community in general and probably would not be provided by the private sector in sufficient quantity, if at all. In the present fiscal year the operating expenditure budget amounted to $215.4 million, or 82% of the total budget of the Government of the Commonwealth of Puerto Rico ($263.2 million). The operating expense budget is defrayed principally out of ordinary revenues of the government, derived in large part from taxes. These revenues also include contributions from the Govern ment of the United States for specific programs or activities under the provisions governing the general program of cooperation with the states. These funds are matched by contributions from the Government of Puerto Rico and are estimated to amount to some $16 million for the current fiscal year, or 7% of the operating ex penditure budget.

8.3% of the operating expenditure budget is set aside for in dustrial development and the development of agricultural resources. The largest portion (about 30%) is devoted to education, followed in importance by public health conservation, which absorbs another 14.7%. Other traditional government functions, such as the protec tion of life and property and public welfare, also receive substantial allotments. (See table I.) One fact which should be brought out at this point is that the vital function of economic development — industrial promotion — for all practical purposes did not exist in fiscal 1940: In that year the central government only spent

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815,000 on that activity, out of total operating expenditures amounting lo 822.8 million (1) The operating expenditure budget has increased markedly in recent decades. In the current one, for example, the operating budget grew from 894 million in fiscal 1950 to 8215 million in the current fiscal year: in other words, it has more than doubled. A part of this increase is due to the increment in price levels (including wages and salaries) which took place during that period, but the other important cause of the increase is the expansion of existing programs and the initiation of new activities. In the case of education, for example, the proportion of school age children who attend school is much greater than it was at the beginning of the decade. Also, new activities such as the literacy campaign have been undertaken, as well as the supply of books free of charge to all children who attend public schools, the pro gram for discovering and aiding extraordinarily talented students, etc. Similar expansion can be mentioned in the case of other activities, such as hospital and public welfare services. In a country that is insufficiently developed economically the growth potential for public services is very high, and therefore the operating budget follows a continuous tremí toward marked growth. To give an indirect idea of the magnitude of the needs that called for government attention at the beginning of the decade, despite advances achieved in the previous one, it is sufficient to point out that the Planning Board in its Economic Program for the six-year period from 1919-51 indicated that appropriations for permanent public works (including the ones proposed in that pro gram itself) were sufficient “to provide about half of what was needed to reach a minimum level of public services in Puerto Rico. . .” (2) The potential for public services is not the sole explanation back of the expansion of services that takes place in the measure that economic levels rise. There is an important interrelation be tween social services and economic development progress: the rela tionship between the industrialization process and education provides us a clear example. Education is not only an end; from the point of view of economic development, it is also a means. Industrializa tion calls for labor endowed with adequate skills, which simul taneously constitutes a further demand on the educational system. The reference here is not only to apprenticeship in industrial techniques, but to the need to effect substantial increases in enroll(1) Economics Division, Planning Board, "Economic Development of Puerto Rico, 1910-1950; 1951-1960.” February, 1951, pp. 76. 172. (2) Fifth Six-Ycar Economic Program, p. XIII.

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merit al different educational levels, reduce illiteracy, turn out ad ministrators, engineers, etc. TABLE I By-Purpose Breakdotvn oj the Operating Expenditure Budget, Fiscal Year 1959. Operating % oj Purpose expenditures Total (in millions) 100.0 Total S 215.4 30.8 Education 66.3 14.7 Health 31.6 10.0 General administration 21.7 9.7 Protection of persons and properly 20.8 8.9 Public welfare 19.1 5.3 Development of agricultural resources 11.4 3.9 Pensions, and other social security programs 8.4 3.0 Industrial development 6.4 2.7 Debt amortization 5.8 Transportation and internal 2.6 communications 5.6 2.0 Worker-Employer relations 4.4 .6 Recreation and parks 1 -3 5.8 Others 12.6 In a sense, the upward trend in government expenditures is similar to the expansion process that occurs in the consumption ex penditures of a poor person who finds that his income is increasing. This individual also has a great potential for expanded consumption. More important, the increase in expenditures on the part of the average individual has a repercussion on government services. Just to cite one example taken from daily life: the fact that there ivere 140,000 motor vehicles in 1958 in comparison with 26,847 in 1910 of necessity was reflected in government services connected not onJy with highway construction, but also with road maintenance and the regulation and enforcement of traffic laws. In the measure that im provement in the general economy provides greater revenues foi the government, this additional income is passed on to the public in the form of additional services. Conclusion These comments on the growth of the operating budget also indirectly attest to the importance of continually improving the ap propriate processes, methods, and available information to insure that budgetary desicions will be increasingly well-taken. In the last two decades our budgetary system has been the object of various reforms with a view to increasing its efficacy. The present discussion has indicated certain directions in which it is trusted that this reform activity will continue.

ECONOMIC PLANNING SEMINAR

October 27 — November 28, 1958

RAPID ECONOMIC DEVELOPMENT AND THE MONETARY SYSTEM By Mohinder S. Bhatia Planning Board of Puerto Rico

RAPID ECONOMIC DEVELOPMENT AND THE MONETARY SYSTEM By Mohinder S. Bhatia

Planning Board of Puerto Rico

This lecture will sketch in broad outline the proper behavior ° l]1C moJnetary system in an economy that is undergoing a very acce: eratea development. For the sake of convenience my talk is Bleed into three parts: a) an introduction the impact had on e monetary system by rapid economic development; b) an analy sis o the effects of economic development on prices; and c) a dis cussion of the role played by the banking system in the develop ment of an underdeveloped country.

Introduction

Economic development brings with it a continuous improve ment in standards of living as measured in terms of national inf°me, per capita income, and the manner in which national income is distributed. Economic growth produces changes in the combina10n of economic factors, in technology, and in production levels. n a par with development, increases are effected in capital re serves and the rale of capital formation, which in turn bring about an increment in the proportions between capital and land and capital and labor. Production becomes more capitalized. Changes are wrought in the social structure, in cultural patterns, and in all the lenavior standards of the economy, government policy, and society. -.conomic development broadens man’s horizon, going beyond purey ocal markets into regional and national markets. Finally, deve opment demands a radical redistribution of economic resources since increases in income bring about substantial changes in con sumer needs. . I his process is generally carried out in three stages: beginmng, transition, and final. In the beginning stage the groundwoik is laid for development on the basis of historic growth. The second, or transition, stage seeks to effect accelerated growth through predetermined efforts; and the final stage endeavors to bring the so®jo'ec°nomic structure into good adjustment. The present lecture will deal only with the initial and transitory stages. , Jn a highly-developed economy per capita income tends to grow rapidly. Having once reached a certain level of prosperity, the trend

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toward greater development is spontaneous and autonomous. How ever, underdeveloped countries do not experience this autonomous de velopment trend but rather appear to depend on external stimuli. Ex ports are the basis for their growth; and since these are dependent on international demand, they give rise to a very slow expansion, if any. Due to this fact, the rate of growth in national income does not exceed the rate of growth in the population, with the consequent disequilibrium. The objective should therefore be to accelerate the growth of per capita income in order to reduce existing differences between such income in developed and underdeveloped countries. In the transition stage an attempt is made to determine how and by whom economic development should be accelerated. To achieve this a combination of domestic and external forces — both public and private — are called for, founded on stable financial bases that will conserve the rights and liberties common to a capital ist society. Any development plan should consider the maintenance of mon etary stability a primary requisite since inflation not only increases income differences but also effectively retards growth. Inflation ary tendencies lend to inhibit entrepreneurs, encourage speculative inclinations, and weaken confidence in the future. The degree of monetary stability that can be maintained will depend on market ing as well as monetary system mechanisms. Adam Smith considered that the motive force of economic de velopment could be traced to the market. Since development is very closely related to market growth, the former is defined as an increase in consumption as reflected in the volume of purchases. Development is also heralded by the generalized use of a common means of value and exchange, such as the monetary system. The market expands as a result of increases in real income since this implies greater purchasing power ami changes in con sumer tastes and preferences. Transportation and communications play a vital role in market growth, which tends so be self-perpetuat ing. With enhanced sales possibilities for produce, real income tends to increase, which in turn augments demand for products on the market. When there is a greater supply of commodities on the market, income increases still further. This process is destined to continue when transportation and communications systems between markets are improved and when the quality of the products of fered for sale is perfected. The function of the monetary system is to control the volume, availability and value of money in the economy. It exerts its great est influence through controls on the reserves which serve as the basis for the credit operations of the banking system. Tremendous changes have taken place in the monetary system since 1930. The disturbing forces which grew out of the First

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World War, the Great Depression, and the Second World War pre cipitated a development which has put down deep roots in our modern industrial economy. During the past century it was taken for granted that the economy would stabilize itself by way of a spontaneous reaction to automatic forces over which the community could exercise very little control. Economies were governed by gold movements derived from balance of payments fluctuations. During the inter-war period, and after a great deal of effort, a certain amount of emancipation from this automatic adjustment process was achieved, and the need was emphasized for each gov ernment to make up its respective development program in keeping with standards of internal stability and full employment and with a certain amount of disregard for its balance of payments. This liberation has been of the greatest importance in underdeveloped countries where the principal objective is to accelerate increases in income and production. The monetary system is one of the instru ments to be employed in achieving those objectives, and consequent ly should be designed in such way as to expedite economic devel opment, maintain financial stability, and keep imports and ex ports in balance, without retarding the growth of national income and employment. The monetary authorities in these countries are faced with institutional factors that are very different from those common to a developed country. Many of these factors will be beneficial, while others will constitute a problem when endeavoring to maintain a certain degree of monetary equilibrium. For example, the lack of investment institutions and the rudimentary securities market will oblige prospective investors to depend principally on bank loans. As a result, the credit policies of the central bank will exert a greater amount of influence on the availability of investment funds. In like manner, a smaller public debt will mean a decline in in terests; thus the central bank enjoys a wider field of action.! ) * On the other hand, the dispersion of the money market and the rudimentary characteristics of the capital market weaken central bank control since the regulation of interest rates has an almost im perceptible economic impact. The influence of the bank interest rate and of open-market operations is even further reduced in the light of the inelasticity of liquidity preference. Medium- and long-term loans in underdeveloped countries car ry a relatively high rate of interest. This is caused by the short age of savings from the point of view of supply and the high risk * The outstanding public debt in underdeveloped countries is small; in consequence, the amount of money needed to redeem the debt is also small. This gives the government a free hand in regulating bank rates.

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expectation from the standpoint of demand: it does not necessari ly imply high productivity of capital. )(** To increase investments, monetary authorities should provide incentives for savings, lower interest rates, and reduce the expecta tion of risk. It has been found that there is a high correlation in the mon etary system between the degree of specialization, interchange, and development. The industrial revolution generalized the use of paper money and bank notes. The evolution of credit instruments leads to better financing of certain productive techniques and the main tenance of adequate inventories, and facilitates the development of certain very necessary methods for controlling the money supply. Development expands the monetary sector of the economy and contracts the non-monetary sector. As a result, the proportion be tween the turnover of total income and the currency increases; this, in turn, makes it necessary for the money supply to grow at a more rapid rate than increases in incomes. (* ) Monetary institutions should be developed on a par with market growth and the expansion of the use of money. In the initial de velopment stage, money lenders give way to commercial banks. These banks require a certain amount of regulation to protect the interests of the depositors and the economy in general. In a closed economy the money supply should increase sufficiently to guarantee price level stability. Monetary stability in an economy open to for eign trade signifies the maintenance of a stable currency circula tion measured in terms of price levels and of the relationship be tween the national currency and that of other countries. On oc casion there is a conflict between external and internal stability, and between stability and growth. The monetary authorities are the ones responsible for achieving equilibrium between growth and ** In underdeveloped countries a great number of advantageous invest ment opportunities are to be expected since these areas are typically poor in capital and rich in labor and other resources. In consequence, marginal productivity of capital should be high. At the same time, these are certain productive investment opportunities that arc not real ized since the country is lacking in certain necessary facilities, such as electric power, transportation and comunications. In these cases the initial fixed costs arc excessively high and the high productivity of capital in prospect is not sufficient to justify the establishment of the industry. Dr. Hans Singer of United Nations believes that this poten tial for high marginal productivity cannot be taken advantage of until such time as these countries invest very substantial amounts in trans portation, communications, and electric power services. * Sec graph on p. 102 of the book by Kindebcrger, “Economic Develop ment” (McGraw-Hill. 1958). This graph compares the supply of money with rates of national and per capita income in 35 nations, and indicates that the money supply increases percentagewise and substantially with each increase in incomes.

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stability. In some cases a moderate inflationary trend can serve to stimulate economic growth; but it requires constant vigilance and opportune corrective action. Any economic disequilibrium can be counteracted by government measures with regard to the currency. In the section following I shall discuss the monetary policies and mechanisms needed in order to protect the stability of an economy in rapid development. II.

Stable Development

Economic development is a complex process. Apart from in vestments in capital goods, it requires a social attitude that is disposed to accepting the changeover to new sectors and newr productive tech niques, institutional measures that stimulate enterprise and invest ment, technical and managerial skills that enable the new’ produc tion methods to be effective, and a healthy and well-trained labor force that can adapt to the new production procedures. In underdeveloped countries there are several factors ■which tend to create instability during the development process. In the first place, in those countries pressures to increase monetary income and consumption are greater than pressures in favor of augmented production. This means that demand is greater than supply and in flationary currents are generated. Secondly, the financing of a large amount of investment in capital goods does not derive ex clusively from savings. This type of investment generates monetary incomes, but not real income, since the projects involved can pro duce results only at long term. This delay between investment and production also contributes to the disparity between supply and demand. In the third place, when monetary income increases, the increase in imports is proportionately greater than increments in real income. Given higher incomes, imports expand at a faster rate than exports. The balance of trade deficit is aggravated, and thus the well-known balance of payments problem arises. Inflation is a costly means of increasing investment, both in social and economic terms. It stimulates investment in inventories, real estate, and balances abroad and discourages investment in agri culture and certain industrial fields. It also decreases the value of savings and undermines confidence in the national currency. In consequence, the scant resources available for development are diverted to sectors where their effects on production are the least significant. Inflation may stimulate investment for two or three years, but thereafter socially-productive investment drops back to a level lower than that prevailing prior to the inflationary process. For underdeveloped countries the basic problem lies in as suring a sound and continuous growth in investment in the various sectors of the economy in such way that economic momentum and

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the increased capacity to save will permit a high level of invest ment. Inflation inevitably undermines the country’s balance of pay ments position since exports ordinarily decline, with the conse quent drop in income derived from foreign trade. The demand for unessential imported products increases and causes a drain on for eign exchange reserves. The foreign exchange shortage makes it difficult to import the material and equipment required in continu ing the development process. If the payments problem becomes acute, even the importation of basic articles may be threatened. Even more important, the job of attracting foreign capital may become quite difficult if the situation persists. Economic stability, however, should not be confused with price rigidity. An economy in process of development should be suf ficiently flexible in point of price structure. Otherwise, the move ment of real resources toward those sectors characterized by a high rate of growth will be blocked. Certain price controls are desirable by way of an emergency measure. Al long term, however, they will be offset by distortions in the pattern of production. Invest ment resources should be channelized through the price mechan ism toward those sectors where a greater expansion in production is required. This may mean some increase in prices. In this case the increase is functional and should not be confused with an in flationary increase. However, it is not easy to distinguish between one and the other. \\ e might point out that inflationary increases generally reflect excessive demand for goods and services and in consequence the entire price-wage structure lends to rise, whereas functional increases are limited to the sector in process of expan sion. Even in the last-mentioned sector the increase in prices should be relatively small — just enough to stimulate the movement of resources in its direction. As soon as productive resources are mobilized adequately, the increase in prices should come to a halt. In an economy where resources arc inadequate, to try to main tain a high level of investment would result in a general increase in prices. This is both the cause and effect of inflation. Whatever credit is created should be related to increases in gross national product in the interests of a stable economic development. How ever, if the shortage of savings causes an excessive amount of credit for investment financing, an inflationary situation will result. The country must proceed with caution: at the same lime, excessive caution in administering credit policy can have adverse effects on levels of production. For the sake of argument we might say that underdeveloped countries never will have the necessary resources for a development program. If the investment level were adequate, it would not be necessary to plan the development of an economy’ under the free

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competition system. Even when estimates indicate that funds for development financing are equal to the planned investment level. this does not necessarily mean that real resources will be available to meet that particular level of investment. The amount of re sources actually available will depend on the reliability of estimates covering domestic savings and foreign assets. Availability of cap ital will also depend on financing carried out by the financial ins titutions designed to transfer funds from the sector that saves to the sector that will employ them. A deficit in total resources as compared to the development plan may result in a failure to obtain financing from any sources other than the creation of excessive credit. Fbe chronic shortage of real resources has prompted many economists to advocate the expansion of bank credit for purposes of development financing. Owing to the situations of unemploy ment and underemployment in underdeveloped countries, certain economists argue that some amount of inflation should be permit ted. Others recognize that although bank credit expansion produces inflationary tendencies, such a situation would not be as harmful as a continuous stagnation of the economy. This point of view is rooted in the assumption that in underdeveloped countries a large part of the labor force is employed in the agricultural sector, which is the least productive. The transfer of these workers to other, more productive areas would not occasion a decline in the production of foodstuffs. Further, these workers should receive wages at least as high as those earned as farmers or farmhands. Since agricultural production would continue at the same level, income from agri culture would remain the same. Aggregate income would increase by the amount of the investment. Even if the marginal propensity to consume were to decrease as a result of an increase in aggregate incomes, consumer expenditures would expand. This means that short-term demand for consumer goods would increase and would not be matched by a proportionate increment in supply. (* ) This would bring about an increase in prices. Without doubt the crea tion of bank credit to finance development of an underdeveloped country will result in some future increase in the production of con sumer goods; but this increase will not be sufficient to satisfy the increased demand currently being generated. In more developed countries the creation of credit will provide more employment and increases the supply of consumer goods, so that demand is equal to supply. Put in underdeveloped countries existing unemployment and * This is due to the fact that in the initial stages a substantial portion of investment goes to capital goods industries. At short term these generate purchasing power without increasing the supply of goods. It it not until some years later that the fruits of such investments are obtainable.

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underemployment point to a lack of resources in financing the rapid expansion in the production of consumer goods. Credit policy can play a positive role. When real resources are in short supply, credit policy should discover the deficiency of money and keep that deficiency from hampering the country’s de velopment. It should assure that credit offered by the banking system will have the maximum effect on productive capacity. The need to increase the monetary flow will be greater in the measure that underdeveloped economies expand. The necessary increase in money supply will in no case be less than the increment in pro duction, and it will be greater if production progressively gains in importance as a result of expansion in manufacturing and trade and higher specialization of agriculture. This means that it is necessary to increase the amount of money not only because pro duction has expanded, but also because the ‘’monetized” sector of the economy is enlarging. This increment is not inflationary; if any less, it would bring about a stoppage in growth or possibly even a contraction. The foregoing implies that changes in the money supply are not considered as causes of economic develop ment, but rather a condition attendant thereon. Further, such changes are deemed essential to the realization and maintenance of growth potential. (") The money supply can be increased by purchasing foreign as sets and creating credit. In countries in process of development, under traditional monetary systems an increase in the money sup ply was invariably accompanied by an accumulation of gold or foreign exchange in the monetary reserve. A flexible monetary system requires that an increase in money supply bring with it ad ditional money reserves. This takes into account the fact that an increase in production is associated with expansion in foreign trade and with marked fluctuations in foreign exchange receipts and pay ments. The portion of the increase in money supply that is not matched by the accumulation of foreign assets must derive from the creation of credit. The active element in the growth of the money supply is the action of the central bank in influencing com mercial bank behavior. Changes in the government’s cash balances also increase or decrease money supply in the hands of the public if not offset by some other measure. The increase in the amount of money owned by the public represents savings matched by real re sources that can be invested. When investment takes place through bank financing, this means that public savings are channeled * Some economists, such as Professor A. H. Hansen, assign a passive or accomodativc rote to money. In illustrating his point Professor Hansen cites a rather graphic analogy: A man’s pants expand because his cir cumference increases: his circumference docs not expand because his pants get bigger. (See Monetary Theory and Fiscal Policy — McGraw-Hill, 1949, p. 186).

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through those credit institutions. The establishment of such credit within appropriate limits makes it possible for the public to keep a great part o£ its savings in the form of money and thus insure price stability in the economy. The distribution of bank credit among the different borrowers will influence the direction of flow of the investment originated in those savings. The governments of certain underdeveloped countries are too ambitious in their development programs. As a result, current in come and loans on the part of the commercial banks and the public are not sufficient to supply the demand for money. To adjust re sources to needs, the government resorts to borrowing from the central bank and draws down its cash balance. This type of financ ing is known as “deficit financing.” At times it is a healthy means of encouraging private enterprise to invest; at others, it may be inflationary. It is healthy when used to assure an adequate money supply and to increase the use of savings. If deficit financing is undertaken without considering the effects that it can have on the money supply and the availability of resources, it will inevitably lead to inflation and therefore obstruct the development program. The relative advisability of deficit financing depends fundamental ly on the magnitude of the credit involved, the environment in which it is carried out, and the accompanying policies. If inflation ary tendencies already arc present in the economy, this tvpe of financing will aggravate the problem. In the absence of inflation ary pressures, there is no objection whatsoever to its use, provided the amount of the financing is no greater than that called for by an adequate credit policy. I should point out that the creation of credit equivalent to the reduction in reserves attributable to a balance of payments deficit (whether on capital or current account) is not inflationary and in fact is essential for purposes of replacing the amount of money with drawn from circulation and thus avoiding deflation. In a country where the money supply is closely related to economic policy, a balance of payments deficit is appropriate and can be financed. When there is a deficit on the current account, credit must be ex panded to meet the additional supply of goods and services made available by foreign trade and to permit domestic investment to exceed domestic savings. When there is a deficit on the capital ac count, credit expansion obviates the necessity of using domestic sav ings to compensate for the net export of capital and thus allows all savings to be used for investment within the country. Deficit financing or the creation of credit to restore the mon ey supply does not increase the amount of real reserves: it simply decides who is to use them. If the money supply is replaced by means of deficit financing or by government Ioans to commercial banks, real resources equivalent to that amount will be available

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for use by the public sector. If the supply is restored through com mercial loans to private banks, the corresponding real resources will be available to the private sector. Deficit financing is one aspect of credit policy. At the same time that it provides necessary financing for the different productive sectors, an adequate credit policy should avoid the creation of surplus purchasing power which can bring on inflationary trends. Credit should also be distributed among the different sectors in such way as to obtain the maximum in economic development. Deficit financing can only be judged within the total context of credit poli cy. It is the responsibility of the authorities concerned with monet ary policy to determine how much of a deficit is necessary and what amount is excessive for purposes of mainlaning a stable credit policy. It is possible to estimate how much additional credit can be created without incurring the risk of serious inflation. The crea tion of added credit will depend on the amount of money in exist ence (* ), future development programs, changes in the level and structure of gross national product, and the influence it can be ex pected to exert on cash balances and reserves. Credit creation should not constitute a goal of the economic development program. Contrary wise, it should serve as a guide that is sufficiently flexible to permit molding to current economic events. With the aid of economic projections on the different sectors of the economy, the amounts of money needed to finance development can be projected also. If production were to increase more than expected, it would be necessary to expand credit still further. If. on the other hand. the increase in production is lower than that anticipated or if the balance of payments position is unfavorable, less credit should be created. Insofar as possible, credit should not be created through deficit financing. Part of it should derive from an increment in private banking operations. The new credit should encourage private enterprise to increase agricultural and industrial production. Fur ther. it is almost certain that the banking system would expand credit excessively if full-scale deficit financing were to be resorted to. Let us assume that the government is going to create credit in an amount of. say, “X” billion dollars, using deficit financing. To the degree that the deficit is matched by a decline in foreign exchange reserves, bank capacity to expand credit will not increase. In this case deficit financing will have warded off a contraction in * Money is defined in terms of the functions it performs — which arc basically three: (1) a means of payment; (2) a source of purchasing power; and (3) a standard of value. In a given country paper currency and coins in circulation and sight deposits held by the banks accomplish these functions. Therefore, money supply at a given moment is equal to currency in circulation plus bank deposits.

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credit that otherwise would have taken place in the commercial banks. However, if deficit financing represents a net increase in money supply, this means that banks will be able to expand their credit further. A part of the increase in the money supply will re main in the hands of the public in the form of currency, but an other part will go to the banks in the form of increased deposits. Increased deposits mean greater reserves, which in turn form the basis for expanded lending, unless some other action is taken to counteract this process. As a result, the expansion in aggregate credit will be greater than the “X” billion dollars which is the amount needed by the economy for financing increased production at a stable price level. Inflation would be the consequence. To aviod inflation, deficit financing should not exceed the amount withdrawn from foreign exchange reserves plus a certain fraction of the net increase in the money supply. When economic development programs are implemented, the economy grows and becomes more dynamic. However, risks atlendent on a credit policy are greater in countries where develop ment resources are in short supply. These countries are in dire need of an effective credit policy, and the banking system should respond to policies instituted by the central bank. How can this be accomplished? The third and last part of this discussion will take up that aspect of the monetary system.

HI. Tire Banking System in Underdeveloped Countries In developed countries central banks exert an indirect influence on the level of economic activity and devote themselves for the most part to secondary activities. The efficacy of central bank operations is even more limited in underdeveloped countries where, by definition, the money and capital markets arc also underdeveloped. In these countries the money supply is deficient in relation to national income, and currency in circulation is more important than bank deposits. Although banks can control the volume of commercial credit, this control exercises the greatest effect on deposits of money, which is the least im portant component of total money in circulation. This does not by any means imply that a central bank is unnecessary in underde veloped countries; quite the contrary, there is a great need to adopt monetary and credit policies that will aid in financing economic development at the same time that monetary stability is maintained. In countries at a high level of development credit and financial systems mature through private enterprise for the most part and on a par with the growth of industry and other economic sectors. However, in many underdeveloped countries the private sector can not be exnected to take the initiative in financial development in the light of the absence of an organized capital market, the lack of interest, and the risks invok’d in obtaining benefits from financ

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ing the agricultural and industrial sectors. In these countries central banks follow monetary and credit policies aimed at a system of financing not only to control inflation and deflation, but to look to development needs as well. At the same time these policies must be sufficiently selective so as to influence investment pat terns. In underdeveloped countries the central bank can serve the general public, the government, or business firms. It has been argued that the primary functions of the bank may be in conflict with its commercial banking operations. It might also happen that commercial banks regard the central bank merely as a competitor and therefore pay small attention to its suggestions and instruc tions. There is a modicum of truth in all this, but it should not be given a great deal of weight. The majority of these countries are at the threshold of eco nomic development. There is a great need for developing more financial institutions in order thus to encourage the expansion of commercial channels and increase capital investment in industry as well as agriculture. One way to achieve such development is to build up banking facilities and services as quickly as possible, particularly in the regions characterized by the greatest population density. The problem we face is: H ito is going to do the job? Certain highly-developed countries have banks that carry out international operations and establish branches in the ports and other commercial centers of Puerto Rico. They have specialized in financ ing foreign trade and in promoting the movement of export items toward the coast. This might provide a good foundation on which to carry out development and expansion of banking services in these rather isolated regions. There arc certain obstacles, such as ignorance of the language and customs, lack of confidence, insecurity, etc., that tend to discourage foreign banks from expanding their services to foreign trade. These obstacles have been partially overcome by employing local personnel in administrative as well as clerical posts. However, there is even further potential for growth of foreign banks, although there is a greater need for growth on the part of banking institutions native to the country itself. This need can be satisfied in part by the independent com mercial banks. These institutions are easy’ to organize, but they entail a certain degree of weakness. The most important consists in the unjustified concentration of commercial risk and in the difficulty' of attracting and obtaining sufficient capital and person nel having the desired administrative aptitudes. In an economy under development the realization of large-scale business enterprise implies great promise of profits since the risks involved are equally great. Under these circumstances, local banks tend to be very fragile, and their growth should be fostered by’ the central bank.

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These banks should also be trained in certain banking standards or policies designed to protect the interests of their depositors. In spite of all these stimuli, the rate of development of this type of bank may be so slow that the country’s needs will remain unsatisfied. If such is the case, the central bank should be in a position to take the reins and fill the physical as well as financial needs. In the initial economic development stage this condition of unsatisfied needs may persist for some time. If, however, this is not the situation, the central bank should abstain from this function. Further, when commercial banks are capable of substituting for the local branches of the central bank, the latter should be withdrawn. In our day central banks are very much aware of the economic situation prevailing in their respective countries. Routine transac tions carried out by their branches in regions of the interior assist the central banks in obtaining a more thorough and direct knowl edge of the general conditions in the country’s economy. Another incidental but highly valuable advantage is that central banks serve as the training base for personnel ■who later will occupy manage ment positions in private banks. So that there may be effective central banks in future, young men should at present be trained in appropriate central banking policies and techniques. If these young men obtain practical knowledge on banking techniques, they will be better fitted to perform their jobs when the occasion arises. The Government, Bank From the outset the idea was accepted that the central bank should be the banking unit to handle the government’s financial needs. In well-developed financial systems there is a recognized need for coordinating public debt management with prospective monetary policies. This coordination will come about more natural ly and easily if the central bank is in charge of carrying out all of the financial transactions of the government. The government should further consider the bank as its advisor in financial affairs. Moreover, the government can be of great help to the bank, in view of the profitable business its operations should provide for the latter. To assure a balanced development accompanied by monetary stability, the government should rely on the central bank for the issuance of notes; and the bank, in turn, should distribute notes and coins over wide geographic areas. This would help to place money in circulation in certain sectors of the economy? and in this way the entire economy could be integrated under a single monetary system regulated by the central bank. The Commercial Banks9 Banker Most important to its function as comptroller of the financial system is the central bank’s activity as the banker for private and

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independent credit institutions. Through this function it acts as the source to which banks can turn in times of internal liquidity crises. In an underdeveloped economy this service is highly im portant. Despite the fact that at the beginning it is difficult to establish powerful financial institutions, the central bank should do everything possible to encourage the advent of sound institutions and counteract the growth of the unsafe banking elements. In the United States of America, England, Belgium. India, etc., certain government authorities are specifically charged with detailed inspec tion of the commercial banks. This supervision should be carried out for the purpose of serving as a positive guide rather than a simp’c audit. Through its commercial banking services for other financial institutions, the central bank substitutes for this system of legal inspection. Apart from the services mentioned the bank can and should lend the incidental guidance implied in its func tions as the commercial banks’ banker. In benefit of the money market, the central bank should not afford equal protection to all its clients but should give greater preference to those concerns that are the most desirable from the standpoint of economic develop ment. For this purpose it should formulate the standards that should be followed by the commercial banks in their financial transactions. For example, it should stipulate the degree of liquidity that the latter should maintain as well as the distribution of reserves that the latter should maintain as well as the distribution of reserves that should be effected among long-and medium-term assets. At no time should the problem of economic development be forgotten. Ordinarily the central bank should require greater liquidity of a small bank than of a large one. and it should encourage small banks to make short-term loans in preference to long-term lending since it is much more difficult to estimate a borrower’s credit standing twenty years hence than within the next six months. It is more feasible for the larger banks to take greater risks since they can maintain specialized departments employing the services of experts in the field of long-term investment. The central bank should maintain a certain balance between long-term and short-term loans granted respectively by the large and small banks in the interest of maintaining a desirable degree of liquidity throughout the system as a whole. (* ) Insofar as possible, the bank should avoid the imposition of rigid financial standards and at all times should stimulate com mercial activity. As long as the central bank has an understand ing attitude in keeping with its high purpose, it will gain in prestige and at the same time accelerate the development of a more complex * There is a greater need for long-term credit in underdeveloped coun tries — a need that is not being properly attended to at present. Care should be taken not to lay undue stress on liquidity.

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monetary system and therefore will augment its own powers as comptroller for monetary stability. The Central Bank as Comptroller The bank interest rate: The central bank traditionally operates on the basis of the rediscount rale or bank interest rate, and its faculty to purchase and sell securities on the open market. As pointed out earlier, in underdeveloped countries the participation of the central bank in the ordinary banking business provides it an opportunity to control credit directly. However, the bank’s ef fectiveness in this sense may be limited. In many underdeveloped countries commercial banks maintain cash reserves in excess of legal requirements and do not plan to borrow from the central bank or undertake rediscount operations with that institution. In addition, the foreign banks that occupy positions of importance within the system have access to the financial resources of their home offices and of other foreign branches. The bank interest rale presumably serves the following purposes: (a) a fine charged on delayed payment; (b) a control over international capital movements; (c) a brake on the accumula tion of goods; (cl) a means of regulating demand for real resources incorporated in fixed capital (doing so by means of the influence it exerts on the interest rate structure) ; and (e) an index. Purpose (a) implies that a high bank interest rate penalizes those who are forced to seek liquidity in excess of their reserves in times of crisis. The second purpose is to reduce or accelerate the export of capital by means of a change in the bank rate. In underdeveloped coun tries where the problem consists in importing rather than exporting capital and where capital is supplied for the most part from direct investment, the bank rale is hardly effective as a regulator of the movement of foreign capital. The third function is to regulate securities reserves or inventories that are sensitive to changes in bank rates. In countries in process of development this objective can be easily attained if there is an important business nucleons that handles the supply of articles of prime necessity. However, it is probable that the effectiveness of the bank rate depends on the changes accompanying the availability of credit — that is, if the objectives are to be achieved. The fourth purpose can be ac complished through the bank rates in a more or less indirect way. Commercial banks generally are reluctant to grant long-term Ioans for permanent improvement programs. These important capital projects can be financed out of undistributed earnings of private industry or through the issuance of stock shares or long-term bonds. The cost of the funds and the ease with which they are obtained can be influenced by changes in the bank rate. In underdeveloped countries funds to finance public utilities, which require a high

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investment level, have been supplied by loans from abroad. The comparative ease with which foreign capital is obtained will be affected by the bank rate in the country granting the loan. Hence it is apparently not necessary to alter the bank rate of local banks in order to regulate the demand for capital. Underdeveloped coun tries should actively encourage the growth of domestic savings and the development of a securities market and the banking system and in this way create the requisite conditions that will enhance the importance of the bank rale. There have been times when an increase in the bank rate has constituted a notice to the world of business that it should proceed cautiously, while a reduction has attested to the existence of beneficial circumstances. The ef fect of bank rate fluctuations (the fifth purpose) has been an impressive indicator in times past. However, in recent years the picture is somewhat different since the government has assumed the responsibility for avoiding liquidity crises and business depres sions. Even in the United States where there is no balance of payments problem, the notice served by the bank rale is only one means of combatting economic cycles. Increased bank rales are a sign of future prosperity that serves to stimulate the expansion of demand (since the rale movement constitutes official support of private optimism) rather than occasioning a decrease in that demand (due to the increased cost of money). On the basis of the five purposes outlined above, we conclude that in order for the bank rate to have some effect in under developed countries, it should represent an operational cost rather than a mere symbol. The central bank should be in active and constant contact with the credit conditions with which the planners, industrialists and merchants in its native land must cope.

Open-Market Operations.

When the bank changes the rate of interest other credit agencies should also change their terms. How can this be done? Open-market operations are the traditional reply. In more de veloped countries, the central bank, by selling securities for cash, absorbs a part of the cash reserves of commercial banks and thus reduces the latiere’ lending capacity. The central bank can stimulate credit by withdrawing a part of its cash reserves and purchasing stocks on the market, thus augmenting the cash reserves in the hands of the commercial banks. In order for open-market operations to be successful, the govern ment must own a considerable amount of securities that can be sold on the market with relative ease. It should be pointed out that government securities tend to increase in volume in the measure that economic development advances — and they will expand more rapidly if they can be easily sold on the market. In underdeveloped

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countries the application of open-market operations is limited since the securities markets are small. The paper owned by the govern ment is not liquid, and the rate of interest paid on these securities is much lower than the interest rate prevailing on the open market. If the interest rate on these government-held securities were to be increased to a point where it -would compare favorably with interest paid on other commercial paper, an increased market and sale could be expected. However, it should be kept in mind that higher in terest on government securities also increases the cost of govern ment loans. The central bank cannot operate in a vacuum. Until such time as the bank is able to fill that vacuum, a substitute must be sought. The answer probably lies in an already-identified technique which increases the cash reserves that the private banks are required by law to keep — a technique developed in the United States beginning in 1936. By requiring commercial banks to hold the proportion between reserves and deposits to a minimum, the central bank can immobilize a part of bank deposits at no cost to the government and at the same time directly influence the avail ability of bank credit. If this proportion is increased by central bank decree, the effect of commercial bank contraction is exactly the same as that resulting from a given amount of open-market sales. Surplus reserves can be eliminated easily. Another way to keep commercial banks from holding excessive reserves is to add govern ment securities in the measure that required reserves are increased. If desired, reserve deficiencies can be created in order to oblige bankers to borrow from the central bank at the rate of interest established by the latter. In addition to its use in the United States this technique was adopted by various Latin American countries in the ‘40’s, by Asiatic and European nations after the war, and by New Zealand in 1954. This weapon is one of the most important available to the central bank in underdeveloped countries that lack an active securi ties market. Another way to exert a direct influence on the liquid ity of commercial banks is to manipulate the balance in the gov ernment’s account with the central bank. There are always net receipts or net payments, derived from government transactions with the general public or the commercial banking system. Net payments serve to counteract a deflationary situation, and net re ceipts stave off inflation. Net payments constitute a direct con tribution to the economic situation and may be reinforced by trans fers to the cash reserves of the commercial banks. Net receipts directly reduce the pressure of demand and can be combined with the absorption of cash reserves in the public account and thus restrict commercial banking activity.

In underdeveloped countries the money market is imperfect in addition to being small. Any action taken by the central bank

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to channelize credit in a given direction must have the desired re sults. This can be done through what are known as qualitative credit controls. Credit margins permitted by stock exchange speculation can be regulated in such way that they counteract undesirable fluc tuations in the securities market. Consumer credit terms can be altered to either hold back or stimulate the demand for consumer goods, and real estate mortgage terms can be regulated so as to influence the development of industrial operations. Local circum stances will dictate the form of selective credit controls and the particular sectors to which they will apply. In general, strong measures such as legal reserve requirements, selective credit con trols, credit rales and rediscount rates, in contrast to the soft-pedaled approach of open-market operations and bank interest, are extreme in their effects owing to the low liquidity of underdeveloped econ omies which is particularly noteworthy in Latin America. Central banks can be of a great deal of assistance to under developed countries by streamlining economic activity or at least making it less irregular. A new central bank should stimulate the growth of commercial banks in the economy. The mere existence of the banking system is not enough in itself since a bank without deposits has no value. A well-organized banking system can facili tate, but not provide, the bases for economic development. Bank ing services are likely to be more efficient if assistance from a central bank is available. Further, economic development means an in crease in bank deposits and an expansion in banking activity. which can eventually result in substantial earnings. Conclusion

We have analyzed the way in which rapid economic develop ment in monetary stability are mutually helpful and constitute pre requisites for elevating a country’s standard of living. We have emphasized that credit policy should encourage the nation’s eco nomic activity. To accomplish this task the government, the world of business, and financial institutions will have to develop a genuine spirit of cooperation, for failing that, none of the planned ob jectives can be achieved. Cooperation implies sacrifice. All eco nomic progress is based on cooperation and hard work. Commercial banks, aided by the central bank, should meet the challenge and shoulder a fair share of the responsibility.

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APPENDIX GROWTH OF BANKING ACTIVITY IN PUERTO RICO The monetary relationship between the Commonwealth and the United Slates plays an important role in the island’s economic de velopment. The fact of having a common monetary system con siderably facilitates capital movements to and from the United States. The incorporation of the island as the Second Federal Reserve District — which was approved January 1, 1958 for the purpose of making transactions by check less cumbersome — also contrib utes to stimulating the capital movement between the United States and Puerto Rico. This system enabled Puerto Rican banks to discontinue the practice of charging a commission for cashing checks, including the transfer of funds between the continent and the island. Since the year 1950 banking activity has registered a greater rate of growth than that reflected in the economy in general. Bank loans increased by 180% and private deposits by 130%, while gross national product increased 70% by 1958. Savings account deposits increased from 32% of total private deposits in 1950 to .4-8% by 1958. Bank loans and deposits in the United Stales during the same period increased respectively by 93% and 29%. Despite the rapid increase in loans and deposits outlined above. the use of banking facilities in Puerto Rico is not as widespread as it is in the United Slates. One of the factors that has contributed to the development of deposits is the opening of new bank branches, which increased in number from 51 in 1950 to 81 in 1957 and 86 in 1958. Statistics covering the past two years indicate that bank deposits amounted to 8'1 16.000.000 in fiscal 1958, representing an increase of 812 million, or 10%, over the previous year. In 1957 the increase amounted to 847 million, 13% above the figure corresponding to 1956. Private savings accounts and sight deposits accounted for the major portion of the increase in total deposits, which rose from 8237 million to 8278 million, represent ing a 17% increase. Deposits in private savings accounts registered a greater increase than did deposits in checking accounts during the last two fiscal years. Nevertheless, checking account deposits amounted to 8149 million, which in absolute terms exceeds the sav ings deposits level by some 820 million. The rapid increase in savings was partly in response to the high rale of interest paid depositors. This type of deposit constitutes one of the most im portant sources of operating funds. The combined Ioan portfolio amounted to 8331 million during fiscal 1958, representing an increase of S21 million, or 7%, over the previous year’s figure. Out of the total number of loans, those

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granted to commerce and industry took first place, followed by loans to private individuals. These two types of credit operations made up 50% and 20%, respectively, of composite lending. $54 million were lent to the real estate industry in 1958, compared to 838 million 1957; thus the increase in 1958 over the previous year amounted to 42%. These figures represent 12% of total loans in 1957 and 16% in 1958. The increment in this type of loan in re cent years is the result of increased incomes, the availability of Federal Housing Administration facilities, and the acceptance of FHA mortgage loans on the United States market. In the fiscal year 1958 bank investments in securities amounted to 8120 million, or an increase of $4 million (3.5%) over fiscal 1957. However, there had been a 7.5% reduction in fiscal 1957, traceable to the fact that investments of foreign banks established in Puerto Rico dropped from S21 million in 1956 to practically zero in the year following. Therefore, the increase in investments in the fiscal year 1958 was attributable in its entirety to domestic banks. The increase in deposits and Ioans was accompanied, how ever, by a reduction in commercial bank reserves. Whereas in 1950 those reserves were twice the legal requirement level, in 1958 the surplus was reduced to approximately 19%. In absolute terms, actual reserves amounted to 833 million, compared to the $28 mil lion required by law. Domestic banks have improved their position within the total growth of the banking system. Total bank assets increased from 88 million in 1950 to $23 million in 1958. The proportion of these assets corresponding to local banks amounted to 56% and 61%, respectively. Their share of private deposits increased from 58% in 1950 to 64% in 1958. On the other hand, the domestic bank participation in total lending decreased from 54% in 1950 to 51% in 1958, owing to the fact that foreign banks have brought in funds from their main offices. The rapid development of local banks, as a result of the vast economic growth, has facilitated credit expansion in the economy, stimulated competition in the field and improved the credit supply as related to demand, thus preventing a greater increase in the interest rate.

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SELECTED BANKING STATISTICS AS OF JUNE 30, YEARS 1950 TO 1958. (Millions of Dollars)

1950 : 1952 : 1954 : 1956 : 1957 : 1958 Total Assets 285.4 : 328.7 : 342.8 : 418.9 : 449.1 Total Loans 291.3 119.8 : 182.7 : 185.3 : 252.5 Total 70.6 Investments 68.9 86.7 96.9 : 70.6 Total Deposits 240.7 379.3 275.1 282.2 : 335.8 70.4 70.2 76.3 Public 82.6 : 80.8 303.1 194.3 211.7 265.6 158.1 Private 190.7 132.5 Demand 106.9 139.9 176.6 51.2 61.8 71.8 88.9 112.4 Savings Capital Accounts 16.4 18.0 19.6 : 21.5 14.6

: 485.6 311.8 77.9 425.1 69.9 355.2 185.0 170.2

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ECONOMIC PLANNING SEMINAR October 27 — November 28, 1958

THE IMPACT OF ECONOMIC DEVELOPMENT ON THE BALANCE OF PAYMENTS By Alberto Morales Laureano

Director Balance of Payments Bureau of Economics and Statistics Planning Board of Puerto Rico

THE IMPACT OF ECONOMIC DEVELOPMENT ON THE BALANCE OF PAYMENTS By Alberto Morales Laureano

Director Balance of Payments Bureau of Economics and Statistics Planning Board of Puerto Rico

Balance of Payments Defined To enable a better appraisal of the impact of economic devel opment on the balance of payments it is advisable to define or ex plain what we mean by balance of payments. Many divergent balance of payments concepts exist, but it is generally agreed that the most adequate definition of the phrase is that adopted by the International Monetary Fund: The balance of payments consists of a systematic record of all economic transactions effected during a given period between the residents of a nation or area and the residents of the rest of the world. In keeping with this definition, the balance of payments of any country is simply a résumé of all international transactions carried out between that country and the remainder. The combined total of these transactions is broken down into two large balance of payments accounts. The first — current ac count ■— comprises all transactions that do not exert a direct in fluence on the creditor-debtor position of the country under study, plus capital and non-monetary gold movements. Commercial and service transactions are registered under this account as are re mittances or unilateral payments. International merchandise move ments (visible exports and imports) constitute the major item in this account, and are followed in importance by the income and pay ments movement within the “invisible” services classification. As mentioned above, personal remittances and unilateral payments also fall in this group. The capital account summarizes all those transactions which occasion any change in the creditor-debtor position of the country in question, and also comprises monetary gold movements. Oidy by reference to the capital account is it possible to ascertain the true situation of an economy over against the economic circum stances prevailing in other countries. Unlike the current account,

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capital transactions are registered on the basis of net change — in crease or decrease — in assets and liabilities, rather than referring to gross volume. An increase in assets represents national invest ments abroad, and by the same token an increase in liabilities represents' foreign investments in the country involved. In conse quence, an increase in assets and a decrease in liabilities indicates the existence of capital exports; and a decrease in assets and an increase in liabilities represents a capital inflow. Records of balance of payments transactions are kept follow ing the principle of double-entry bookkeeping. Items of income are credited and items of payments or expenditure are debited. Every debit entry must be offset by an identical entry on the credit side. For the effects of balance of payments, all sales (exports) of goods and services are registered as a credit for the reporting country and all purchases (imports) of goods and services as a debit. Exports and imports constitute the principal items in any balance of payments. If the total value of exports during a given period of lime is entered as a credit and the total value of im ports as a debit, a balance will result that will be either negative or positive. When the balance is positive I i. e., when the credit exceeds the debit) a favorable trade balance is said to exist. When the contrary occurs (when the debit is greater than the credit) that balance is said to be unfavorable. In our day the statement that the trade balance of a country is favorable or unfavorable has no meaning whatsoever. These were the terms applied under the mercantile system to countries that had, or did not have, sufficient capacity to finance their trade deficits in terms of gold. A country that managed to obtain an export sur plus, which resulted in an inflow of gold, was considered to be in a favorable position. A net outflow of gold indicated an unfavor able situation that testified to the country’s economic decline. The belief that an unfavorable trade balance indicates a reces sion or mismanagement in point of economic stabilization still persists today. Although it does provide an index to an important activity, the trade balance docs not provide sufficient information to enable a diagnosis of the economic structure of a country in re lation to its foreign trade. A country that lacks the raw materials and capital goods that are requisite for its economic development will experience heavy trade deficits over a period of many years. In time this accumulation of raw materials and machinery will pro duce an increase in exports of manufactured goods, thus offsetting the former deficits. The balance of payments serves much better than the trade balance in giving an over-all picture of international transactions: The trade balance simply measures the difference between the value of merchandise exports and imports. Although in itself the

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trade balance is the most important balance of payments component, its analytical significance is not very revealing if the remaining international receipt and payment components are excluded — e. g., transportation services, travel expense, government expendi tures, capital yields, and long- and short-term capital movements. This general balance of payments concept leads to the consideration that a nation or area can consume more than it produces in goods and services. A country can consume more than it produces if the additional consumption is donated to it, if it borrows from abroad, or if it liquidates its foreign assets. In effect, the balance of pay ments shows us that the balance resulting from goods and services transactions can be financed by means of gifts, loans, liquidation of foreign exchange reserves, and the repatriation or accumulation of foreign assets. The interpretation and analysis of balance of pay ments components would not be complete if the over-all statement were to fail to consider the ever-increasing importance of the capital account. The various items summarized in the capital account show how the deficit or surplus resulting from current-account trans actions with the rest of the world is financed. By way of instruments of economic analysis, the balance of payments and gross national product are unexcelled for purposes of explaining and understanding the operations of a national econ omy and identifying economic trends. A thorough knowledge of the economic structure of a country is not possible unless instruments are available that measure magnitudes in the national economy. Gross national product and the balance of payments are very closely lied in with the economic pulse of a country. It is absolutely essential to measure goods and services imported in exchange for goods and services exported, and determine the volume of goods and services owing to, or owed by, a national economy as a result of invest ments effected in a previous period. Gross product measures the flow of goods and services produced in a given unit of time, whereas the balance of payments summarizes the transactions carried out by a country with the rest of the world, also during a specified time period. International trade and its accounting expression — the balance of payments — influences the formation of gross product; hence the importance which attaches to the balance of payments in ac quiring full knowledge of the economic structure of a country. General Characteristics of the Balance oj Payments of Underde veloped Countries

Let us briefly review the foregoing discussion: We said that the balance of payments is one of the most valuable analytical in struments in use today in appraising the creditor-debtor position of a country over against the rest of the world. We also pointed out

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that a country cannot be considered a debtor by virtue of experienc ing an unfavorable balance on its current account. Only when its long-term debts exceed the value of its long- and short-term foreign assets may we say that its position is that of debtor. A surplus of payments over receipts on the current account will have temporary repercussions, with the principal effects being felt in international reserves. This implies a certain detriment to its economic system which, in the measure that the necessary remedial action is taken, will be transitory and of slight importance. When a country uses its international reserves to liquidate its current account balance, it reduces its savings and thus affects the external stability of the na tional currency. The effects are also felt in the remaining sectors because national income suffers to a certain extent. This is an opportune moment to point out that if the use of international reserves is in response to a surplus of capital goods imports, this attests to the development of the country’s economic potential rather than representing a detriment to the economy. Obviously, of course, every country should maintain a certain level of foreign exchange reserves that will enable it to cope with fortuitous situations that normally are difficult to deal with. All the foregoing is very characteristic of countries in the early stage of development. The balance of payments presents problems that require the attention of competent authorities in order to ob viate economic disorders of an internal and external nature. For purposes of maintaining balance of payments equilibrium, recourse can be had to exchange controls, international trade restrictions, and regulation of the monetary system. Thus we find that underdevel oped countries restrict the consumption of articles of foreign man ufacture in order that their purchases abroad may be more closely in line with the amount of resources available to finance them. A balance of payments analysis will turn up data that are char acteristic of such countries. Trade statistics reveal only scant progress owing principally to deficient development that reflects a lack of resources and other means essential to substantial production. Exports are composed largely of certain products which have ab sorbed practically' all the main force and effort expended by' of ficial as well as private endeavor. The economic advantage derived from marketing those products generally depends on conditions and factors that are not subject to national control. Economic dependence on products of this nature is unsafe and uncertain and should not be relied on for purposes of economic and social accomplishments. Raw materials, agricultural products, livestock, semi-finished goods and ores do not offer the security and stability' inherent in the en tire combination of those products and manufactured goods. Since a country' of this type depends on specific markets for the sale of its products, it will likewise be dependent on the coun

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tries where those products are sold. Consequently, a decline in the prices for its merchandise reduces the value of its exports and simultaneously diminishes its capacity to pay for the importation of essential goods that are not produced locally. Moreover, this uncontrolled deficit in exports brings about a similar reduction in national income that in turn is the decisive factor insofar as savings, investment and consumption are concerned. This entire situation shows up in the balance of payments of any country. The impact of foreign trade difficulties takes the form of fewer exports and imports than were originally anticipated. If the country in question produces principally for export, its situation with respect to the ability to satisfy minimum needs will become precarious.

Current variations in international liquidity and the growing scarcity of merchandise point up an anomaly that is ruinous to underdeveloped countries: When they have money they do not have access to international markets, and when they do enjoy such access, they do not have enough money. This situation which has direct repercussions on the economic and social development of the peoples involved can be overcome solely by means of vigorous pro motion of the industrial development program that will enable their products to satisfy internal and external demand in competition with those originating in more developed countries. Underdeveloped countries are peculiarly resigned to facing their own problems by sole recourse to national resources. This valid and characteristic sketch of underdeveloped countries is borne out in the capital transactions recorded in their respective balances of payments. Every effort should be made to use every cent of investment — irrespective of its source but provided that it is genuinely productive — to the best advantage. The inflow of capital is a vitamin injection in the productive veins of the economy. Standards of living increase as employment opportunities become more plentiful, and government funds can be diverted toward the realization of other public welfare objectives that are so difficult for underdeveloped countries to satis fy. There is the further advantage that such capital inflow can be used to finance balance of payments deficits. These funds from abroad in the form of long-term investments should be applied to unfavorable balances growing out of the importation of capital goods rather than to meeting demand for consumer goods. Another very characteristic feature of the balance of payments of underdeveloped countries is to be found in the inflow and out flow of money in connection with the rendering of services. This is an item in which underdeveloped countries ordinarily experience a deficit. Dependence on foreign maritime facilities for the move ment of merchandise in international trade implies additional ex penditures that must be immediately disbursed. Economies lacking their own maritime freight facilities are seriously affected by the

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continuous rise in maritime freight rates which eventually is re flected in the cost of living. Another activity that contributes heavi ly to the debtor balance is insurance which for the most part is handled by foreign firms. Payments for this service are of benefit to the economy if the insurance companies invest their earnings in the country in which the service is rendered. Other miscellaneous payments are quite small, but in combination they swell the current account deficit. The following items figure among the last-men tioned group: motion picture film rental, government expenditures, royalties, and incidental expenses not incorporated in the remain ing current accounts. In summary, the balance of payments of underdeveloped coun tries attests to stagnation in international transactions. Generally speaking, little growth is observed in export products. The major ity of these items are subject to rather marked fluctuations in response to variations in external markets. Many of these variations are due to prices, thus making it impossible to establish definite trends for use in fixing development goals. In the measure that the total value of exports changes, imports expand or contract. As explained earlier, the capital account is the balance of pay ments sector that tells us how much a country owns abroad and how much it owes to foreign nations. In underdeveloped countries cap ital transactions arc represented principally by foreign investment comprising loans or direct investment that qualify as long-term operations. The most common type of transactions involve short term capital movements that have uniquely adverse effects on coun tries in the early stages of development. Currency movements and bank transfers for purposes of liquidating balances are classified within the short-term capital category. Summarizing the general characteristics of the balance of pay ments of underdeveloped countries, we may slate: (a) that varia tions in international transactions depend largely on the capacity to pay represented by the outflow of primary products; and (b) that in line with the instability for which underdeveloped countries have a propensity, a rigid control is maintained over the exchange of goods and services for the sole purpose of seeking equilibrium.

Changes in the Economy During the Economic Development Process and Their Ejject on the Balance of Payments

When analyzing economic progress in a country during the development process, certain basic characteristics emerge, as well as the determining factors governing that process. It is possible to determine immediately the degree of development reached in the different branches of production, distribution, services, and other elements that contribute to the productive process. The volume of foreign trade, international trade terms, and capital inflow and out

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flow all constitute determining factors in economic progress. The relative importance of foreign trade (exports and imports of goods and services) in the over-all picture of the economy indicates the degree to which the national economy is integrated with the world economy in the sale of its produce. Foreign trade also affects the internal availability of goods and services, and it is worthwhile to observe recent trends in the movement of the principal items com prising that trade. The terms of trade (i. e., the relationship be tween price levels for purposes of the international exchange of goods) is the measure used to indicate the manner in which prices on exports have evolved in comparison with those corresponding to commodities purchased abroad. Capital transactions reveal the de gree of dependence on the external sector for the continuing growth of the productive installations that are so vital to increased income and productivity. Let us discuss now the changes that take place when a country has reached the development stage. Balance of payments statistics are extremely useful in measur ing progress achieved from one period to another. Foreign trade data, for example, are highly important in determining economic policy not only because they measure the magnitude of the exchange of merchandise between countries but also because these transac tions almost always constitute the largest and most homogeneous balance of payments account. They are useful in the sense that they provide information on the items that it would be advisable to export or import in keeping with the general situation of the country. They furnish the state with specific data for use in for mulating the most appropriate fiscal policy as regards duties and other charges on given articles and services included in the import trade. The primary aim of this entire policy is to aid private commerce — particularly the concerns devoted to exportation and importation operations. In application, however, this policy should be guided by the changes that lake place in national production as well as in consumption habits. Therefore, when analyzing the balance of payments of a coun try under development, the various changes that have taken place in its international transactions can be measured, as can levels of in come and gross product. In the measure that the country’s re sources transfer from less-productive activities to those producing a higher yield, a change comes about in that nation’s pattern of exports and imports. This docs not imply that a given product will disappear from the list of foreign trade items, but that it will become less important in terms of volume and vahío. The fac' that a major product declines in relation to the total of gross produc tion docs not mean that the productive activity involved is in a state of decay: In the measure that new articles are produced, these may turn out to be more advantageous for the economy, particular

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ly if production is geared to consumption. If the growth in income has not been accompanied by an equal or greater growth in the internal production of consumer goods, the portion of unsatisfied demand must be met from imported goods. Apart from the demand for consumer goods, an important demand also arises for capital goods and other very urgent facilities needed for the development program.

Progress observed in a country’s international transactions — and particularly in trade transactions — gives adequate evidence of the changes that have been taking place as a part of internal evolution. The most significant change will have taken place in the growth of industrial production. Equally important is devel opment in other sectors of the economy, especially in the agri cultural economy that forms the foundation for the economic and social structure of underdeveloped peoples. The development of the agricultural economy permits the national economy to provide labor for other developing sectors and at the same time to satisfy increased demand for foodstuffs and raw materials in response to the growth in income and to the expansion and diversification of production. Higher income originating in the agricultural sector broadens the market for industrial products and encourages economic develop ment. However, dependence on this sector as the principal factor for the development and improvement of standards of living is very lim ited owing to the instability inherent in agricultural production. Un favorable weather conditions, the discouraging world market outlook as a result of the accumulation of surpluses in various countries, and the competitive advantages accruing to such surpluses when they arc placed on the international market have all been determing factors that led to industrialization. The effects of the changeover from an agricultural economy to an industrial economy are eventually re flected in a modification of the composition of exports as well as imports. The exportation of manufactured products acquires greater relative importance in foreign trade. The impact on exports of the above mentioned basic economic change is the most noteworthy in the case of raw materials. The transformation of raw materials into finished products has implications both for exports and the pattern of imports. Obviously, imports of non-income-producing consumer goods are reduced, while an increase is registered in the importa tion of capital goods for productive purposes. Every expansion program must of necessity be accompanied by the corresponding investment. The success of economic develop ment depends in large measure on the amount of private capital that can be attracted to the various industries that are already in operation or in process of establishment. Whatever the develop ment program adopted, due consideration — devoid of political or national prejudice — should be given to enterprise of any type.

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Due to the relative shortage of capital available to an economy that is entering upon an accelerated stage of development, it is im perative to stimulate investment in local industries. Since private capital is not available in sufficient amounts to convert the speed of development into a source of investment, it is up to the state to supply, by means of a capital investment and subsidy program, suitable buildings for factories, credit, and other advantages that will offset the relatively high initial costs incurred in all develop ment programs. In other words, for purposes of accelerating the industrialization program, it is necessary for the government to provide factory buildings (which in effect is the same as though a loan had been made for industrial purposes) and to make outright loans to industry to encourage private capital to invest in the pur chase of equipment and the establishment of working capital. The experience had in other countries indicates that a decisive attitude must be adopted with regard to the extension of credit with a view to affording the proper impetus for economic development. In this connection, certain known risks should be taken and loans should be granted at long term. Banks and other private financial institu tions cannot be expected to assume these extraordinary risks. It should be pointed out that all new investment should where possible give priority to industries devoted to the manufacture of articles made from locally-produced agricultural products, and to the service in dustries that arc so necessary in the endeavor to attract other types of industries having an important expansion potential. There are certain accelerated development programs that by virtue of their enormous importance for the well-being and develop ment of the economy in general lay claim to financial assistance from the government sector, apart from whatever private initiative is able to do in this respect. In these instances the state assumes functions that ordinarily correspond to private firms or industrial ists, since the latter are not in a position to realize undertakings of doubtful feasibility. Since promotional programs are of vital im portance to the general economy, it is the government’s duty to look Io the wise and orderly increase in all available resources so that the foundation for economic development can be firmly laid without implying neglect of the essential services that must be offered to the people as a whole.

fhe process of establishing a new industry inevitably leads to the use of foreign exchange since a large proportion of the neces sary equipment will in all probability have to be purchased from one or more industrialized nations. It is also quite likely that a part of the funds paid to the factors of production will be used to pay for imports. The degree to which the entire investment constitutes a problem for the balance of payments will depend on the nation’s surplus or accumulated reserves. In the absence of foreign aid, the

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rate of growth will be limited in the first place to the amount of the balance of payments surplus,-since this will govern the amount of resources available for financing the imports of capital goods and other products needed by the service factors, or the purchase of raw materials from abroad to supply the new industries. Therefore, the establishment of a factory marks the beginning of the process. Once the plant is constructed and the business is operating normally the industry will continue to exert an influence on the balance of payments. On the one hand, it contributes to a savings in foreign exchange by producing goods for export or items for local consumption in replacement of imports. On the other hand, the same industry will make it necessary to use foreign exchange to cover the importation of raw materials, accessories and parts for plant repair and maintenance, and whatever additional articles are required from abroad by the production factors. The unfavorable balance of payments position which may arise from the industrialization program can be corrected through foreign credit (loans) for financing the original investment. Although the burden of additional debt constitutes a problem insofar as payment of principal and interest is concerned, it will be relatively unim portant if the country invests the capital thus obtained in industries for export or factories producing consumer goods that will replace former importation.

When the initial funds are provided by direct foreign invest ment, a problem arises in connection with the payment of capital yields — earnings and dividends — to investors. If these persons decide to repatriate their profits or dividends, there will be a sub stantial drain on available reserves. For this reason many countries impose restrictions on foreign capital investment. To appraise the effects of industrialization on the balance of payments problem, one must keep in mind that the program will extend over a number of years in which the use of foreign ex change for the payment of capital goods import- will continue at a normal level. The establishment of each new industry implies a certain flexible claim on foreign exchange resources to cover the importation of the necessary capital equipment and raw materials. In consequence, a certain degree of control will be exercised over the importation of consumer goods.

Very few countries under development have an export potential sizeable enough to permit them to carry out the program without having to make use of foreign exchange. In many' of these coun tries the dearth of foreign exchange is one of the greatest obstacles to industrialization. In view of this fact, it is very important that the need for foreign exchange be weighed as a part of the industrial program when evaluating investment opportunity in a

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given industry or in connection with a specific production tech nique. Industrialization does create balance of payments difficulties. However, this happens only if investments exceed domestic savings and capital imports or if the industry is unable to produce at a cost that would permit its products to compete. Obviously, the degree and speed of industrialization vary from country to country, depending on the use to which domestic re sources are put; the type, magnitude and variety of exports: the amount of its gold and foreign exchange holdings; and the avail ability of capital and raw materials for the new industries. Importance of the Balance of Payments as an Analytical Instrument and Guide to Economic Development

At present the majority of nations are bending their every active effort toward the development of their economic resources, Although it is true that many factors are taken into account in deciding which industries will be the most advantageous, priority is almost always given to those that can satisfy some local demand in substitution for imports (as revealed by business statistics) or to those industries enjoying an export market, as indicated by sta tistics on trade between other countries. Trade statistics included in the balance of payments not only reveal the existence of demand, but also give an idea of its mag nitude. They further provide the necessary information for unit price estimates, thus facilitating cost analysis, and the preparation of indexes on prices, value and amount, and the terms of trade. The balance of payments demonstrates to us that for purposes of sound and successful development it is necessary to channel everincreasing amounts of production to investment or, if desirable, to obtain the necessary capital from outside sources. The balance of payments reflects the effects of the transfer of increasing amounts of economic resources from less-productive to more-productive activities. Exports of products derived from primary activity will decline whereas new articles produced by the secondary or industrialized sectors will begin to show up in the export break down. Here trade statistics will indicate whether the country is re ceiving assistance from abroad or whether it is increasing its invest ments in foreign countries. Development programs produce immediate changes in an econ omy. The increase in production leads to higher personal incomes, particularly if financing has been domestic in origin — i. e., based on the utilization of savings or credit expansion. In consequence, there is greater demand for goods and services, which increases the tendency to import. If care has not been taken to make other pro visions, foreign trade and the exchange system may become an oh-

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slacle to the development program. Balance of payments statistics for previous years serve as the basis for estimating the probabilities of success and the likely effects of that development program. The probable increase in exports can be estimated by analyzing the corresponding price movement during prior periods. Well-prepared foreign trade statistics make it possible to arrive at estimates for each item, group of items, and the total. At the same time this analysis on exports will enable us to determine whether there has been a decline in foreign demand for nationally-produced goods. The com plete results of this analysis will aid in the formulation of projections which will serve as the basis for predicting necessary investments and appraising their relative justification in the light of increases obtained in production of consumer goods or in the importation of capital goods. Any change effected in the various balance of pay ments accounts will indicate the measure in which capital investments have been expanded and judiciously allocated for the purpose of lending greater strength and regularity to the country's growth. Im ports bought in by a country depend in greater or lesser degree on exports of goods and services and the balance on the capital move ments account. By means of the analysis of the items of information mentioned above, it is possible to ascertain the pattern and characteristic of de velopment and identify the factors that tend to stand in its way. As is well known, various factors of both internal and external origin influence the evolution of production and national income. The ac tion of each of these should be studied separately. Of primary interest among the factors of external origin are the volume of foreign trade, international terms of trade, and capital movements. Foreign trade — exports and imports of goods and services — will indicate the degree to which the economy of a country is integrated with world trade in the sale of its production and the acquisition of goods and services produced abroad. The terms of trade will trace past trends in the evolution of prices on products sold abroad and on those imported for local consumption. Capital movements and the services account will outline the mag nitude of foreign capital’s contribution to the investment and de velopment process and will indicate how much money the country will be obliged to return in the form of profits and interests and amortization payments on that capital. Internal factors involve a variety of aspects. The most im portant point of all is how to evaluate and expand the country’s resources: economically-active population and occupation distribu tion by sectors, productive capacity or invested capital, natural resources used and usable, and productivity per emplovee and by unit of capital in the various activities. It is essential to have access to data on gross production, income distribution, and the breakdown

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of consumption expenditures in order to ascertain how much was saved and in what way investments were distributed. This income savings relationship by factors of production must be established if the analyst is to determine the share corresponding to each in the formation of capital.

In countries under development it is difficult to depress consumption in order to increase savings. There is a strong tendency toward greater consumption, and it is no easy task to change this situation unless income levels are made to vary. The results of such a policy would be disastrous for the economy since low con sumption would affect local production by virtue of withdrawing a portion of the impetus and stimulus formerly afforded the productive sectors. Since these difficulties constitute an obstacle to the de velopment program, it becomes necessary to resort to foreign capital. When most of the income in a given economy is devoted to the consumption or use of non-durable goods, there will be small opportunity to expand savings. If the growth in income has not been accompanied by an equal or greater growth in the internal production of consumer goods, the unsatisfied demand for consumer items will have to be made up from imports. The same thing hap pens in the case of capital goods, keeping in mind that a country under development urgently needs to make use of machinery, means of transportation, and other facilities that promote expansion. The use of foreign capital enables a higher rate of growth without the need to contract present consumption. If the country does not want this situation to persist, it will be necessary to promote the most rapid growth possible in income levels until the point is reached at which new investment can be financed out of domestic savings. However, under no circumstances should consumption be reduced in favor of savings for the purpose of contracting imports and in that way seeking equilibrium with the external sector.

There is a possibility that unnecessary imports might be restricted by way of compensating for the increased importation of capital goods. However, apart from the fact that this does not happen spontaneously but rather requires selective intervention on the part of the state, areas susceptible of further import controls may well be very limited since many countries have already imposed harsh restrictions on expansion in imports as a result of having exhausted their capaci ty to import. Even in instances where the increment in capital goods imports is offset by a reduction in other imports or paid for by foreign capital, the only accomplishment will have been to eliminate a temporary difficulty. A more important obstacle (already mentioned several times in the foregoing discussion) will still block the path of economic development: When income per capita in creases, imports generally tend to outdistance the capacity to import.

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This disparity makes it imperative to substitute imports by locallyproduced goods so that income growth can continue at a rate compatible with the capacity to import. There is another aspect of fundamental importance in con nection with the foreign capital problem that is worthy of immediate examination: the manner in which remittances of profits and interests related to the country’s external payments capacity. Service on foreign capital — that is, the amount of interests and dividends that must be sent abroad either in connection with loans or by way of remunera tion for direct investments — gives rise to major difficulties. The degree and flow of these service payments respond closely to the exchange situation and to the nature of future investments and the corresponding terms (interest rates, amortization periods, etc.). The process of establishing new industries inevitably involves the use of foreign exchange since it is highly probable that the greater part of the equipment required by the new factories will have to be purchased from foreign countries. There is also the possibili ty that when a portion of these funds are made available to the local factors of production a certain share will be used in the purchase of imported goods. The effect of these transactions on the balance of payments depends in large measure on the magnitude of the transactions in relation to the current surplus or accumulated reserves. In the absence of foreign aid. the rate of industrializa tion will have to be scaled down to the level permitted by the magnitude of the favorable balance on the balance of payments (which represents the amount available for financing the importa tion of capital goods and other essential items — raw materials and services — required by the local suppliers of the new industries). The statistical data summarized in the balance of payments jointly provide the bases for judgment on the part of the competent authorities of the country when devising and projecting the sound and wise policy that will permit them to gain a better knowledge of the effects of the nations economic transactions with the re mainder of the world and to simultaneously maintain the external value and convertibility of the national currency. The breakdown of the various items comprising the current account of the balance of payment facilitates an analysis of those factors that modify the creditor-debtor position of the country with respect to the rest of the world, as reflected in the international balance of payments. Economic Development in Puerto Rico and the Balance o/ Payments

The year 1910 marks the turning point at which the first signs of change began to appear in the Puerto Rican economy. On 'the one hand, the political approach to the solution of the economic and social problems under which we were laboring produced good fruits by means of thorough-going legislation that brought the goal of

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economic development within the realm of feasibility. On the other hand, there was the direct impact of defense expenditures which, apart from constituting an element of income vitally needed by the economy, lent strength to the remaining sectors of that economy in such degree that they served as the basis for build ing many public as well as private development programs. In 1940 Puerto Rico’s total population amounted to 1,869,255 inhabitants, or an average density of 546 inhabitants per square mile. Gross national product amounted to 8287 million and national income, 8219 million, indicating an average per capita of S117. Among the sectors of production, the agricultural industries were the major income-producers and absorbed 45% of the total number of employees. 39% of the net insular income was derived from that sector. Manufacturing industries accounted for 20% of the employment opportunities and produced 12% of net income. Trade and services contributed about 11% net income and absorbed almost 25% of total employment. The above statistics serve as the basis for measuring the various changes that have taken place in the Puerto Rican economy during the period from fiscal 1940 up to the present. All these changes had repercussions on the different occupation sectors. Employment in industries and services increased in relative importance while the level of employment in the traditional occupational pursuits declined. Changes in the occupational structure resulted in higher yields in personal income levels and consequently augmented gross produc tion of goods and services. A similar occurrence was observed in the case of existing capital in the various sectors of production in consequence of a new approach for channeling investments toward the most highly-productive activities. Changes in the structure of production as a result of this process stimulated an ever-upward growth in industrial production and other activities which, in turn. expanded the export trade. We have not yet reached the point at which we can free ourselves from the progressive increase in im portation in view of the need for capital goods and the fortuitous difficulties that beset our agricultural export trade. The entire expansion in the employment structure, production and investments plus the great strides in foreign trade are all the product of the techniques employed in order to reach the goals established in the development program. Private capital available for investment was not sufficient to meet the needs of develop ment nrogram execution. Puerto Rico had to establish itself on a solid foundation in order to gain recognition as a favorable site for investment and the establishment of industries. The Puerto Rican government afforded the program the impetus that had been lacking by creating the Industrial Development Company in 1942. This company cleared the way by setting up factories for the produc

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tion of glass containers, ceramics, paper and cement. These factories were sold to private enterprise in 1950. In 1948 legislation was approved to grant tax exemption for whatever industries might he established in future to produce on a commercial scale any product not manufactured on the same scale as of January 2, 1947. Tax exemption was further extended to earnings, dividends and all properly derived from, or belonging to. these industries. Other aid programs were stepped up, including the construction of industrial buildings for sale or rent at low cost, labor training courses, and industrial loan grants by government credit institu tions created especially for that purpose.

It should be mentioned at this point that no single agency among those charged with carrying out the industrialization program was responsible for the success of the development endeavor. Moreover, the creation of other types of agencies contributed to the realization of that enterprise by strengthening, expanding and im proving public services, such as water, electricity, sewerage, transportation, etc. Their participation in the development process was all the more valuable in instances where they had recourse to their own resources (supplied by the sale of bond issues) for financ ing the expansion and improvement of the public services that are so essential to economic development. Furthermore, the self financing faculties of these agencies relieved the state of the need to defray the cost of those services which otherwise would have represented an obstacle in the path of industrial development. The economic well-being of every country depends in greater or lesser degree on foreign trade. The higher the degree of specialization, the greater that dependency. Puerto Rico has traditionally been a supplier of agricultural products, such as sugar, tobacco, and coffee. Trade in these products has been for the most part channeled to the continental United States, which in turn furnishes us with almost all our imported foodstuffs and manu factured goods. This dependence on foreign trade is becoming increasingly important for Puerto Rico in view of the progressive changes that are taking place in the productive structure of the country.

The changeover from an agricultural to an industrial economy has modified the composition of both exports and imports. In 1910 exports of manufactured products represented 22% of total ex ports; by 1957 this commodity group accounted for more than half of the value of total exports. Our traditional export products such as sugar, rum, and tobacco, made up only 38% of the export volume corresponding to 195/. Total exports of goods and services rose from $150 million in 1910 (52% of gross product) to 3663 million (55% of gross product) by 1957.

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Our dependence on foreign trade for purposes of our develop ment is much more in evidence in the changing composition and volume of our imports. In 1940 §139 million dollars’ worth of goods and services were brought in from abroad, representing 48% of gross product. By 1957 this relationship to gross product had taken on much greater emphasis: Goods and services were imported to the amount of §924 million, or 77% of our gross product. A breakdown of this 77% shows that 79% (out of the 77%) was devoted to the purchase of merchandise, -with the remaining 21% corresponding to services rendered by non-residents. Comparative figures on exports reveal that 70% of foreign collections represented the sale of merchandise, and 30%, services rendered to non-residents. Since more than 90% of our trade relations are carried out with the continental United States, the foregoing ratio serves to emphasize the degree of interrelation existing between the economies of the two countries. It indicates further that the future course of pro ductivity in Puerto Rican industry bears a close relationship to the rate of industrial growth in the United States. An analysis of Puerto Rico’s balance of payments reveals characteristics common to a country that is endeavoring mightily to develop. At first glance, it becomes apparent that Puerto Rico’s balance of payments position had been satisfactory but subsequently took a contrary turn. The fact that a negative balance has arisen in our trade and services transactions with other countries might be superficially construed to constitute a cause for alarm. Many' consider this circumstance to be unfavorable since it implies a net capital outflow, (either in the form of a reduction in monetary reserves or the liquidation of foreign assets,) or indicates that the country has gone into debt with foreign nations to such an extent that recovery or equilibrium will be difficult to achieve. At first glance this interpretation might appear to be valid. However, when the situation is analyzed on the basis of the nature and structure of imports, the conclusion is quite different. A breakdown of the 8727 million in fiscal 1957 imports reveals that 42% represented final consumer goods, with the remaining 58% being devoted to capital goods and raw materials whose manufacture into finished goods will bring about an increase in exports and a simultaneous reduction in imports in response to local demand for the new products. The transformation of raw materials into finished goods is immediately reflected in increased income — the decisive factor in the consumption pattern. Our trade statistics show that from 1935-1940 the island exported goods and services worth 892 million, as against imports amounting to 889 million on an average. More than 60% of the export trade corresponded to sugar and its derivatives, testifying to the heavy predominance of this item in our sales abroad. This period was characterized by the economic crisis felt in almost every country’ in the world.

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During the period between 1941 — a war year — and 1947 a series of changes came about which served as the basis for build ing international programs for economic reconstruction and develop ment in underdeveloped countries. The Puerto Rican economy felt the impact of defense expenditures during the Second World War. As a result of the restrictions imposed on the use of maritime facilities, the general economy was benefitted by the forced savings accumulated in every sector during the war years. We built up favorable balances in our goods and services transactions to a total of 8230 million between 1941 and 1916 — a lime of abundant purchasing power but short on consumer goods and capital forma tion. If federal aid payments, personal remillances, and transfer payments are added lo those resources, we have a grand lolal of 8375 million. Of this reserve of liquid assets, 8116 million rep resented hank holdings of United Slates government bonds and similar securities, and S85 million were made up of federal paper held by lhe government and certain private entities. The dif ference was made up of hank balances and the net money movement from Puerto Rico to the United Stales and other countries.

Upon entering lhe post-war period, we found that lhe creditor situation we had maintained throughout the previous years was reversed, and our position between then and now has been consistently that of debtor. As mentioned earlier, this situation does not constitute cause for alarm since the analysis of our imports points up our favorable growth outlook. From 1917 lo 1950 the trade balance averaged some $139 million annually, on the basis of adjusted figures. The unadjusted balance between imports and exports amounted to Sil 1 million on the average. 1 he over-all balance of payments deficit amounted to $131 million, which was reduced to an average of S59 million as a result of unilateral transfers averaging $72 million per year, l he remainder, naturally, was made up from capital out of our reserves and bank balances abroad, as well as direct foreign investments. One significant fact is that foreign exchange reserves accumulated from 1911-1916 to a value of 8375 million were drawn down by only $113 million although lhe accumulated deficit totalled $236 million. To make up the difference additional capital was obtained through the sale of public bonds and direct foreign investments amounting in combina tion to 8104 million.

Three reasons explain lhe change that came about in the balance of payments: (a) the huge pent-up demand for imports built up during the war years, especially in the case of consumer goods and capital goods; (b) financing obtained from federal loans and the sale of bonds by the people of Puerto Rico and their authorities; and (c) private capital reserves that assumed freedom of mobility once the industrialization program had been firmly launched.

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A general survey of the decade under discussion (19'10 - 1950) reveals interesting features in our balance of payments. Puerto Rican exports reached the level of $244 million during fiscal 1949-50, representing a $33-million increase over the previous year, and of $149 million over 1939-40 exports ($95 million). Imports were valued at $353 million in 1949-50, or 82 million less than the previous year and 8244 million more than the import level in 1939-40. Major export items were: sugar and its derivatives, accounting for an average 48%; rum, 19%; needlework, 14%, and tobacco, 7%. During this decade there was no appreciable change in the composition of exports. As in the case of other areas that have not yet achieved sufficient economic development, agricultural products and needlework have constituted the principal export items. This fact indicates that there were no important changes in the economy and that industrial progress up to that time was not significant. A certain amount of variation in the importation of consumer and production goods was observed along toward the end of the decade. From 1940 to 1946 the different import items remained at more or less same level, reflecting the involuntary restrictions characteristic of an emergency period. This limitation of ex penditures led to the accumulation of liquid assest that were made use of in financing subsequent deficits. There were extraordinary changes in balance of payment be havior during the period from 1951 to the present. International trade has risen to a level unprecedented in our history. Exports under went an accelerated rate of growth, having doubled in value between 1950 and 1958 (i.e., from $244 million to $497 million). In per centage terms, the increase registered amounted to 104%. The general composition of our export trade has altered to such a degree that agricultural products that in the previous decade had been the pre dominant element in our foreign commerce last year represent only ap proximately 38% of the total value of exports. Seven years earlier sugar and syrups represented 56% of our exports, and the value of total exports measured in terms of gross product amounted to only 32%. In 1957-58 the ratio of exports to gross product had climbed to 39%. The conclusion is that this level has been reached as a result of the expansion brought about in manufacturing. Bearing eloquent witness to this progress and expansion, net income and gross product increased, respectively, by 30% and 32% during the same period. Imports expanded at a faster pace than exports. From a level of $353 million in 1949-50, they rose lo S757 million in 1957-58, or by 115%. 1950 imports represented 47% of gross product in

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that year while in 1958 that ratio stood at 59%. All increases ob served in imports were due to the purchase of capital goods and intermediate products. Obviously a country lacking in natural re sources or a market of any size can increase its productive capacity only by means of final manufacture of semi-finished goods. Pur chases abroad of capital goods and intermediate products took up more than 60% of the total value of imports during fiscal 1957-58. Recapitulating, the analysis of imports during the last 8 years in dicates a gradual increase in the importation of articles destined for the production sector. This trend was particularly in evidence during the last 5 years. Imports of capital goods will reach their peak when the moment arrives in which payments abroad for the purchase of services and goods are in proportion to receipts from the sale of our goods and services to foreign countries. T A B I. E I ADJUSTED VALUE OF EXPORTS FROM PUERTO RICO, FISCAL YEARS 1935 - 1958 (Millions of Dollars)

Fiscal

Years

1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1919 1950 1951 1952 1953 1954 1955 1956 1957 1958

Sugar and Syrups

Ruin

50 62 73 51 54 58 55 61 57 63 43 80 84 122 126 136 143 130 151 133 132 136 130 111

1 3 5 5 8 11 27 24 101 52 47 27 7 17 22 18 19 20 19 24 23 25 25

Preliminary figures.

Textile Tobacco Manufacture

8 10 10 8 7 6 8 11 10 p 22 21 16 9 10 13 10 13 15 21 22 27 23 23

15 17 21 12 15 16 7 12 7 17 21 26 39 34 36 47 64 56 73 84 89 102 119 114