DEVELOPMENT POLICIES FOR SMALL COUNTRIES: THE CASE OF PUERTO RICO

This study attempts to explain the economic development of Puerto Rico, particularly the nature and causal relations of the rapid rate of economic growth which was experienced from 1950 to 1973 and the slowdown that has been observed since then. An examination of the factors which have shaped that growth was undertaken with an hypothesis that the results were determined principally by the nature of the development strategy: industrial specialization for export markets and integration with the U.S. economy. This hypothesis was subjected to empirical testing by an econometric model consisting of a multiple regression equation in which the dependent variable was real annual growth rates of GDP and the explanatory variables were the production factor inputs, some of the policy instruments, and some relevant external factors. The regression equation explained 55 percent of the variations in GDP growth rates, leaving a large unexplained variance. The results did not support the postulated hypothesis, meaning that there are other important factors besides the development strategy and the links to the U.S. economy, which have determined the pattern of growth. On the basis of this model and other analyses of the Puerto Rican economy which were undertaken, the conclusion was reached that the most important long-run determinants of economic growth have been: the export oriented industrialization and the inputs of labor and capital. Others factors which have also contributed significantly were tax exemption, the government economic and fiscal policies, demographic changes, and the value of imported oil. The events since 1973 have been interpreted to represent a long-term trend: the Puerto Rican economy seems to have reached a level of maturity in which it is subject to wide cyclical fluctuations with a very low net long-term growth rate of per capita output. This conclusion was based on the changes in the trend and composition of capital investment, the shifts in migratory movements, and the physical limits to a substantial future industrial growth. It was finally argued that these trends can not be reversed without substantial changes in the economic and political structure.