By Juan Ruiz Toro

Operation Bootstrap, Governor Luis Muñoz Marín’s strategy to develop and modernize Puerto Rico’s economy, encompassed a number of economic initiatives that began in the mid-1940s. The model was inherently statist; Muñoz’s administration, particularly the Teodoro Moscoso-led Compañia de Fomento (the island’s development agency) was directly involved in the formulation of the strategy and in overseeing its implementation. Among other things, it emphasized industrialization as the development strategy most likely to create jobs as quickly and effectively as was needed to have significant impact on peoples’ economic conditions. As part of this strategy, it advocated shifting toward an export-based economy in which the bulk of the island’s production was aimed at the American market instead of the comparatively tiny local market. Operation Bootstrap was fundamentally about modernizing the Puerto Rican economy; because the government understood that this would only be possible through foreign investment, much of it involved providing tax exemptions to American corporations who set up shop in Puerto Rico. These corporations were then able to capitalize on the lower costs of labor on the island, which further improved their bottom line and made doing business in Puerto Rico even more attractive.[1] Thus, the strategy depended on foreign capital, technology, and entrepreneurial resources, which completely integrated Puerto Rico’s economy with that of the United States.  The relationship between the two included unlimited access to the market of goods, labor, and capital.[2]

Perhaps the economic measure most important to Operation Bootstrap’s success was the tax exemption policy for U.S. and other corporations that invested in the island. Federal corporate tax exemptions had been in place as far back as the Foraker Act of 1900. Under Section 931 of the U.S. Internal Revenue Code, U.S. corporations were exempt from paying taxes on their profits until they repatriated them to the United States.[3] Local income taxes on corporations, however, all but nullified the federal tax exemption until 1947. As part of the administration’s strategy to stimulate industrialization and growth, and having acknowledged the importance of foreign investment to achieve this goal, it passed the first Industrial Incentives Act in May 1947, which eliminated the Puerto Rican corporate tax.

The model behind Operation Bootstrap emphasized the state as a catalyst for local economic production. Accordingly, the government invested in many of the early industrialization projects, which included light industry factories like glass and paperboard producers. Although many of the early investments failed initially, enough of Fomento’s investments in the late 1940s were successful enough that, when combined with the other economic incentives the administration offered, they convinced large multinational enterprises like Textron, which among other things produced spindles, to establish plants on the island.[4]

Industrial growth on the island after 1947 suggests that the tax exemption program was successful. In 1949, the United States Department of Commerce estimated that the 1,998 manufacturing establishments in Puerto Rico employed 55,000 Puerto Ricans, with an average workforce of 27.6 persons per establishment. By 1967, the 2,367 manufacturing establishments employed 121,537 Puerto Ricans, with an average of 51.3 per establishment. Perhaps more significantly, the Department of Commerce valued manufacturing in Puerto Rico in 1949 at $93 million. By 1967, it estimated that manufacturing was producing $621 million for the island.[5] Evidently, Operation Bootstrap successfully industrialized the island. Perhaps more importantly, it successfully shifted the Puerto Rican economy’s dependence from agriculture to industry in less than twenty years.

The island’s economic expansion during this time was primarily due to the Muñoz administration’s active role in stimulating local economic performance; although an important part of this strategy was collaborating with the private sector (which would then provide direct investment), the invisible hand behind Puerto Rico’s economic growth was surely that of Muñoz and the PPD. The government’s tax exemption policies were only one part of a broader agenda to transform Puerto Rico’s economy. The strategy that comprised what came to be known as “Puerto Rico’s economic miracle” consisted of a multifaceted approach to stimulating growth and encouraging investment.[6] In the 1940s, this meant direct investment in establishing factories that produced things like paperboard and glass bottles, which served to show private companies that businesses in Puerto Rico could flourish. Many of these initial projects failed, but enough succeeded to prove investing in Puerto Rico was a potentially very profitable opportunity.

These early attempts at spurring growth in manufacturing went on to influence the expansion of other sectors of the economy. The net income from manufacturing grew from $27 million in 1940 to $486 million in 1964. Though this growth was significant, equally important were the ripples it sent across other sectors of the economy. Perhaps the most telling effect of the growth in manufacturing was its impact on the island’s export economy. Largely because of the growth in internal production, the net income from trade and commerce grew from $26 million to $375 million between 1940 and 1964. Similarly, the net income from finance, insurance, and real estate grew from $25 million to $231 million, and the net income from contract construction grew from just $3 million to $144 million.[7] The growth ignited by industrialization also spread across different sectors of the economy. Economic growth influenced other social and cultural changes in Puerto Rico. Among the most significant changes was the increase in Puerto Rican migration to the United States (in part, because of the integration of the two economies). The era of change began primarily as a result of efforts to eradicate the island’s rampant poverty, which had been exacerbated for decades by excessive dependence on agriculture. In 16 years, the Muñoz administration successfully transformed the island’s economic infrastructure and thus began Puerto Rico’s modern era.