Monday, June 11, 2007

Self-sufficiency and Sustainability

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The Answers to ‘The Big What If’ Question: Self-sufficiency and Sustainability
By Mónica Pérez Nevarez, as published in Business Puerto Rico

Regardless of its Status, Puerto Rico is neither self-sufficient nor self-sustaining at present. What needs to be done to attain a larger measure of both?

In order to become self-sufficient, Puerto Rico has to address several problems: creating jobs in the private sector, balancing a structural fiscal imbalance, promoting agriculture to fill the needs of local consumption, and dealing with federal transfers that currently work as a disincentive to employment, and are but a symptom of the malaise created by the unilateral nature of the relationship between Puerto Rico and the United States (Congress controls federal transfers and trade, and locals have no representation in any federal elections). And within a larger framework, in order to address sustainability, all future policies should begin from a position of environmental consciousness as well as of global competition.


For the last 50 years, the government has focused on attracting foreign investment in order to generate jobs. That same kind of focus and dedication is needed to cultivate local entrepreneurs now. Small businesses account for over 80% of the US labor force. The new businesses would add to Gross Domestic Product, and once the island reached full employment, overall per capita income would increase by 50%.

The shortfall in employment is daunting: full employment requires at least 1.8 million jobs; currently the government employs 300,000, and the private sector 500,000, so one million jobs need to be created in the private sector, mostly locally owned, so profits remain on the island and collateral businesses have a chance to sprout up.

But what makes a person become an entrepreneur? Necessity. That exists. Education. Currently 28% of all local undergraduate students are studying Business Management (GDB figures, see chart , pg.39,).Experience.Studies show that most entrepreneurs have either worked for their own family’s business or in other small family-owned businesses. Since there are so few local businesses, an incentive program must be devised so internships can be created without unduly burdening the small business owner’s finances. Funding. There are extensive resources for helping people become entrepreneurs, but few resources to finance those endeavors. Instead of developing a few targeted businesses, the Government Development Bank should focus on helping wide swaths of neophyte entrepreneurs fund their businesses. Predisposition. It takes a certain kind of person to become an entrepreneur, and not everyone has what it takes to become one. But the current state of joblessness goes a long way in helping breed entrepreneurs, as seen in the vibrant underground economy, which by some estimates ranges from 28% to 33% of GNP, and in the 1.7 million chronically unemployed on the island, so the predisposition exists.

But what is most sorely lacking is a positive business environment. According to Steven J. Davis and Luis A. Rivera-Batiz, in their contribution to Restoring Growth in Puerto Rico (2006) titled ‘The Climate for Business Development and Employment Growth’, “the strikingly underdeveloped state of the Puerto Rican private sector supports the view that Puerto Rico suffers from an inhospitable business climate.” They go on to explain that “the industry structure is misaligned with the human capital mix of its population…the Puerto Rican economy has for decades failed to generate jobs that matched the educational qualifications of the population. The missing jobs are concentrated in labor-intensive industries that rely heavily on less-educated workers. This testifies to a profound failure of industrial and employment policy.” Now, with the competition from China, manufacturing jobs that would have helped fill the gap have disappeared, and the government should focus on incubating entrepreneurs and their small businesses.

One of their suggestions is getting rid of all tax incentives for special interests and imposing a low tax across the board on all businesses and individuals. Davis and Rivera-Batiz go on to say that in Puerto Rico the tax incentives have not been evaluated as to their efficiency within the local economy, and that a similar case in Indonesia, when efficiency studies were performed, showed that incentives were not as important as other factors to foreign investors (such as low tax rates, growth potential, stable government and positive business environment), and that low taxes generally attracted more investment, as well as boosting the local economy. Any time the government gives incentives to some companies but not others, those that are not included degrade or disappear.

Davis and Rivera-Batiz list the following as being contributing factors to the underdeveloped private sector: 1) federal government transfer payment that undermine work incentives; 2) minimum wage laws that discourage hiring less skilled workers; 3) large proportion of public sector employment that discourages the emergence of new private sector businesses; 4) Section 936 of the Federal Tax Code created an industry structure that is not aligned with the type of job opportunities needed by the population (“at best, section 936 provided for a modest number of jobs at enormous cost to the US Treasury”); 5) Puerto Rico’s own tax code benefits special interests at the expense of the general welfare; 6) Puerto Rico’s regulatory environment deters business entry, hampers job creation, and erodes competitive pressures; and 7) the permitting process (construction, real estate development, professional licensing) suffers from serious problems that raise the cost of doing business, undercut the drive for employment growth, and retard economic progress. All of them have to be addressed in order for real improvements to occur.

Fiscal Policy

“…no habia ni nunca ha habido una planificación de la actividad economica” (there was not and there never has been any planning of economic activity…) Eliézer Curet Cuevas, El Desarrollo Económico de Puerto Rico, 1940 – 1972; 1976

“From 1952 to the mid-1980’s, there were no fundamental changes of direction in development policy, only variations on the theme of industrialization dependent on U.S. markets, inputs, technology, financing, and ownership…the local government’s function as a collective capitalist, entrepreneur, and social planner directly involved in the development process [came] to an end with the initiation of Operation Bootstrap [in the 1940’s] and its reliance on external sources of capital and entrepreneurship… Despite an outward semblance of planning and the existence of a planning board and planning laws, there actually has been a surprising lack of instrumental planning for the domestic economy…. Fomento has done planning, of course, but of the sort designed to get results that appeal to U.S. investors... [Economic] planning has revolved around the issue of what is necessary to attract external capital to the island rather than around the issue of Puerto Rico’s needs.” James L. Dietz, Economic History of Puerto Rico, Institutional Change and Capitalist Development, 1986

James Alm, in his contribution to Restoring Growth to Puerto Rico titled ‘Assessing Puerto Rico’s Fiscal Policies’, addresses fiscal deficits and public expenditure, and emphasizes “extensive tax evasion, shrinking tax base, weak tax administration, an unnecessarily complex tax system [creating inefficiencies] and overuse of tax incentives” as the most obvious obstacles to economic growth in Puerto Rico. It is evident that a government that relies on tax income to fund its policies cannot undercut its own income stream by awarding tax incentives for businesses and antediluvian real estate exemptions.

As the preceding quotes reveal, Puerto Rico’s economy needs overhauling. Gilbert Rist, professor at the Institut Universitaire d'Etudes du Développement (Graduate Institute of Development Studies) in Geneva, in the 2002 english edition of his 1987 book The History of Development, writes “The aim [of development] must be to promote ‘sustainable human development’ that favors the poor, nature, women, children and long-term perspectives”. Puerto Rico's policies need to be aligned with sentiments of self-sufficiency such as these, instead of frantically trying to attract foreign businesses to the island.

Rist concludes that one economic model may not be adaptable to all situations, and that imposing one economic model on all economies might not be efficient. According to Rist, current global economic strategy tries to “make reality conform to a simplified model or turns the results of possible observation into the basis of general ‘laws’ which supposedly explain all social practices relating to the use of goods. It is as if, having seen one black swan or one white horse, one were to decree that all others should be the same. There is no doubt that, under the pressure of resource limitation, people sometimes make choices to achieve certain objectives rather than others. What is much less clear, however, is that this represents a paradigm for all possible situations” nor all possible cultures. (Gilbert Rist, The History of Development, from Western Origins to Global Faith, English second edition 2002)

So it is at this crucial juncture in the Puerto Rico’s history that two forces are colliding: first, the undeniable need to fix Puerto Rico’s finances and economic structure; and second, at precisely this point in time, when global warming, Peak Oil and the internet have become facts of life, the whole world has had to realize that the old way of doing business no longer makes any sense.

And there are plenty of innovative ideas and fresh paradigms being carried out by pioneering entrepreneurs around the globe. Some books that shed light on the subject include William McDonough’s and Michael Braungart’s seminal book, Cradle to Cradle, Remaking the Way we Make Things, Paul Hawken’s, Amory Lovins’, and L. Hunter Lovins’ Natural Capitalism: Creating the Next Industrial Revolution, Lester Brown’s Eco-Economy, Building an Economy for the Earth, Marc Benioff’s and Karen Southwick’s Compassionate Capitalism: How Corporations can Make Doing Good an Integral Part of Doing Well, and Brian Nattrass’and Mary Altomare’s The Natural Step for Business: Wealth, Ecology and the Evolutionary Corporation, among many others.

These authors contend that up to now, economies were based upon a linear model whereby natural resources were consumed and the remnants discarded. They propose a closed circuit model of reusing or upcycling all resources, mimicking the natural cycles of the earth (one man’s waste is another man’s treasure). In addition, present economic accounting places no value on the environmental extraction cost or the clean up cost of some industries, or the collateral harm that they do to the environment. Classical economics does not place a monetary value on the natural processes that help sustain life on the planet. For example, a recent study suggests that if corporations were to be in charge of producing all the oxygen and absorbing all the carbon that the Amazon forest produces and sequesters respectively, the cost would be over one trillion dollars, and yet we enjoy it for free.

Which brings all of the above mentioned authors to plead for a new way of accounting: Natural Accounting or Green Accounting. Gilbert Rist explained it this way: “Since it is all about counting, why not count everything? If production is to be totaled up, why not include the destruction which is part and parcel of it, and which would challenge the mechanistic paradigm of economics and its blindness to the irreversibility of time? …Processing activities actually involve numerous costs that the market price fails to reflect. It is time to get out – to move from the realization of failure to an act of rejection, from illusion to reality, from reassuring dreams to serious questions, from high-minded utopias to scandalous truths. The first is that ‘development’ will never exist because it presupposes infinite growth that is in reality impossible. Because in any competitive situation the winners cannot fail to realize that their success is also creating losers.” Not to mention the obvious fact that the earth itself is a finite entity. But out of this conundrum, some visionaries have found a way out. This type of thinking has spawned incredible opportunities for new ways of doing business.

And in the larger context of environmental sustainability, “Economic growth alone has been found to be neither necessary nor sufficient for development to take place, and in some cases it actually appears to have been a hindrance to the process.” (Dietz,Economic History of Puerto Rico). So it is the perfect time for a totally new economic reality to take form in Puerto Rico.


Malthus stated in his An Essay on the Principle of Population, (1798) that “It is an obvious truth… that population must always be kept down to the level of the means of subsistence” ( ) It therefore follows that agriculture is a keystone to a society’s foundation, self-sufficiency and sustainability. The just under 700,000 cuerdas presently under cultivation could feed about 1.8 million people, but a large portion of current production is for export, and 90% of what Puerto Ricans consume is imported. So the island needs to increase agricultural production and focus its agricultural product mix on nutritious staples to be consumed locally. Agricultural incentives, independence from factory farms, and inspired urban planning round out the list of things that need to be done.

And yet, agencies in charge of helping local farmers are themselves under economic siege: in her article The Truth about Agriculture, (El Nuevo Día, 3 junio 2007), Marian González writes: “…the Asociación de Agricultores (ASDA, the Farmers Association) will have to use the $56 million destined to pay subsidies and incentives to fund their payroll” instead of reaching its intended recipients, the local farmers, because their budget has been slashed to 10% of its original amount during the past two years. [italics mine]

There is also the added problem of the finite amount of land suitable for farming on the island. According to Population Action International, the minimum arable land required to feed one person is 0.38 cuerdas, which translates to 1,520, 000 cuerdas needed in order to feed four million inhabitants (4,000,000 x .38). [My original figure of 0.50 cuerdas per person stems from older numbers, so I stand corrected.] Puerto Rico has only 2.1 million cuerdas in toto, divided, according to the Junta de Planificación’s Preliminary Land Use Plan, as follows:
Developed land (in cuerdas): 269,910 13%
Developed at-risk* areas 16,004 0.7%
Agricultural 1,042,975 46% 4% protected
Natural Resource Land** 701,992 31% 10% protected
Rural at-risk* areas 94,581 4%
Total 2,125,462 cuerdas

*at risk means areas known to flood, susceptible to landslides and liquefaction or are polluted (brownfields)
**these include hydrologic resource areas, conservation priority areas, cultural value areas, and Public Domaine areas
( )

So my original statement holds true: there is not enough land available to feed 4 million people; the 1 million cuerdas available can feed only about 2.5 million people. And if global warming creates the expected sea level rise within the next three or four generations, 110,585 developed and rural at-risk areas will be lost, adding pressure to an already tight land use program.

(Map of Puerto Rico that shows all lands at risk from sea level rise. Produced by Harry Justiniano, UPR)

So emigration will have to play a part in our future survival, as well as conscientious land use planning, and creative ecological adaptations such as “urban farming”, and green-manure and crop-cover rainforest farming, (forest preserve farming), pioneered in the Parana Rainforest of Brazil, Paraguay and Argentina (see for story and for map). The need to conserve all natural resource and agricultural land becomes paramount, as only 10% and 4% respectively are currently protected, and so, the land is potential prey for developers, who are fast running out of land to build on.

In the past 24 years we have lost 30% of our agricultural lands. Of that figure 60% was lost between 1998 and 2002. The most endangered lands, those in most need of protection, include la Reserva Agrícola del Sur (the Southern Agricultural Reserve); la Reserva Agrícola del Llano Sur (the Southern Plain); the Lajas Valley; the Karst region; and the red clay areas between Vega Baja and Manati. It is imperative that what remains of the islands’ agricultural land be preserved if the island is to become self-reliant. It is just as important that the island set aside at least 25% of its remaining lands as forest preserves or nature preserves as well, in order to safeguard biodiversity and put a reasonable cap on developable land, as suggested by a panel of University of Puerto Rico professors during a May 8, 2007 roundtable called Enfrentando las Consecuencias del Cambio Climático en Puerto Rico (Facing the Consequences of Climate Change in Puerto Rico.

Federal Transfers and Social Justice

In 1952, Gov. Luis Muñoz Marin was faced with a population of 2.2 million ( ), with only 596,000 jobs available ( ) which means 27% of the population had employment, as opposed to 20% of the population today [800,000 / 4,000,000 = 20%]. In the last 55 years, Puerto Rico has lost ground in terms of percentage of the population employed. As federal transfers increased as a percentage of per capita income, so have jobs declined: in 1952, total transfer payments from the federal and local governments represented 8.2% of personal income. In 2003 federal transfers had increased to 32.8% of personal income (

The good intentions proffered by mainland food, housing, disability and welfare payments had a negative impact on the economy, creating a “Rich Uncle” situation, whereby U.S. based transfers made up a much larger percentage of local income, acting as a disincentive to work, and which has now molded two generations of Puerto Ricans into a staggering non-participation rate of 56% of the population chronically unemployed (1.7 million chronically unemployed divided by 3 million working age population). And because all transfers are controlled by Congress, local government is unable to do anything to change it.

On the surface, it seems impossible to think of cutting back on federal transfers. Half the population of the island is on welfare. 60% receive food subsidies. There is 37% more disability insurance paid out here than in the mainland. 60,000 people are part of the Section 8 home subsidy that would be left homeless without it. Asking Congress to cut down federal spending is political suicide. And yet, until the population is weaned off the federal tit, it will not feel the need to fend for itself. Remember the old saying: Give a man a fish; he will eat for one day. Teach the man to fish; he will eat the rest of his life.

For too long Puerto Ricans have counted on the benefaction and largesse of American federal transfers. Given that there has always been egregiously low employment opportunities, concomitant low wages structures, and a deep pocket blindly trying to help us out of the conundrum, it is time for stocktaking, and deciding to go for the right goal, that of self-sufficiency and sustainability.