Puerto Rico has been in the news recently. The descendants of Theodore Roosevelt are lobbying for a posthumous Medal of Honor for their sire. (Roosevelt himself liked to put it this way: "The bravest man I ever knew was the black sergeant who followed me up San Juan Hill.") San Juan Hill is in Cuba, but the outcome of the Spanish American War was to cede the island of Puerto Rico to the United States under the terms of the Treaty of Paris--on Dec. 10, 1898.
What better timing than that for the plebiscite in two weeks that will determine whether the citizens of Puerto Rico choose to seek statehood?
The vote is the brainchild of Gov. Pedro Rosello, who saw that the island economy was going nowhere fast. For many years, Puerto Rico had been considered a model of economic development in the post-war world.
But by 1996, when Rosello was re-elected to a second four-year term, it was clear that something had gone badly wrong. Despite buoyant job growth in the states, the Puerto Rican economy was stagnating. By then, Rosello and experts in economic development had identified a surprising villain.
A little background: The U.S. claimed the Philippines and Puerto Rico after its war with Spain in 1898. The Jones Act of 1917 conferred U.S. citizenship on Puerto Ricans. In 1950, Congress created a special commonwealth status for it, Guam and the Northern Mariana Islands.
During the 1950s and '60s, "Operation Bootstrap" built industrial parks, targeted "winners" and "losers" among local businesses, and offered tax breaks to U.S. industries. The economy grew at an annual rate of 6.5 percent between 1959 and 1974.
The productivity shocks of the 1970s hit Puerto Rico hard. The top-down, subsidy-driven planning continued, with few good effects. The unemployment rate hit a depression-level 22 percent in the 1980s. Income per capita in Puerto Rico is $8,100, less than a third of the $25,660 U.S. average.
What is stalling Puerto Rico's growth? Local politics and strong local unions surely are part of the answer. The public sector employs a third of the work force--more than double the U.S. average. Efforts at privatization have gone nowhere. And restrictive work rules have raised costs and discouraged investment.
But an even more pernicious mechanism was discerned in the early 1990s by, among others, development consultant J. Tomas Hexner, in an obscure provision of the U.S. tax code known as Section 936.
The offshore tax subsidy found in Section 936 dated as far back as the 1920s, Hexner discovered. Initially it had been intended to spur labor-intensive manufacturing on the island that otherwise would not have located there.
But after World War II, the advantage of the lowest labor costs shifted abruptly to Asia. The hefty tax breaks offered by 936 attracted capital-intensive industries like pharmaceuticals and electronics to Puerto Rico instead. The cleverest corporate tax attorneys in Washington went to work to re-engineer a tax law intended to stimulate the manufacture of baseballs and baseball gloves.
The result was the emergence in Puerto Rico by the late 1980s of a giant tax shelter for drug companies. Meanwhile, little new indigenous industry of any sort has appeared. Domestic capital formation has failed to take off; the share of investment in the economy fell from 29 percent of gross domestic product during the 1960s to 14 percent in 1994.
Section 936 came under scrutiny in the early 1990s because of congressional concern with a balanced budget. The discovery that the Treasury was forgoing up to $4 billion a year in taxes led to a decision to phase it out in the next few years. The end of the subsidy to the Gucci-clad crowd put statehood on the docket.
When a young Chilean economist named Fernando Lefort studied Puerto Rico's convergence with the U.S.--or lack thereof--for his doctoral thesis at Harvard University a few years ago, he found it was the lack of clear-cut political integration, more than any other single factor, that was holding back Puerto Rico.
Were Puerto Rico to become a state, Lefort argued, the convergence effect would guarantee it a higher rate of growth, and its citizens higher incomes.
Hence the complicated discussion of statehood that has taken place among Puerto Ricans. To judge from polls and the local press, support for maintaining its commwealth status has been dwindling, even though Puerto Ricans don't pay federal income taxes under the status quo. A small but dependable faction of voters apparently continue to favor outright independence. The pro-statehood New Progressive Party of Gov. Rosello appears to be gaining.
The vote is scheduled for Dec. 13. More than 80 percent of the eligible voters among Puerto Rico's 3.8 million citizens are expected to turn out; more than half of them are expected to vote for statehood. The referendum binds no one, not even the government of Puerto Rico. But remember this: no group of citizens in American territories yet has organized to seek statehood--and failed to get it.