Puerto Rico's traditional economy was based around sugarcane plantations; of the 516,730 jobs on the island in 1940, almost half were agriculture-based, with 124,076 of these based on sugarcane farms. However, Esteban Bird described in detail the misgivings of the sugarcane industry and the monoculture economy in general. After possession was transferred to the United States in 1898 following the Spanish-American War, it was mostly neglected. Conditions in Puerto Rico worsened during the World Wars, and by the middle of the twentieth century it was one of the poorest islands in the Caribbean. Pressure grew in the U.S. to address the worsening situation, influenced by journalists like John Gunther, who described the island in 1941:
"I saw, in short, misery, disease, squalor, filth. It would be lamentable enough to see this anywhere...to see it on American territory...is a paralyzing jolt to anyone who believes in American standards of progress and civilization."
In May 1947, the Puerto Rican legislature passed the Industrial Incentives Act. eliminating all corporate taxes, to encourage U.S. investment in industry. The initiative granted private and foreign investment a ten year period of exemption from taxes on many of the expenses for businesses involved in the industrial economy. These exemptions included:
- "license fees, excises, or other municipal taxes levied by any ordinance of any municipality,"
- "property devoted to industrial development,
- "income tax on income from industrial development," and more.
This was proposed by Senator Luis Muñoz Marín of the Popular Democratic Party, and became known as Operation Bootstrap. Based on 1930s New Deal economic relief reforms and infrastructure provided by the programs such as the Puerto Rico Reconstruction Administration, Operation Bootstrap intended to move Puerto Rico away from its agrarian system and into an industrial economy. The government's Administration of Economic Development , today known as the Puerto Rico Industrial Development Company (PRIDCO) , encouraged the establishment of factories. Following the Elective Governor Act of 1947 (also known as the Crawford-Butler Act), Muñoz was elected the first governor of Puerto Rico while under U.S. control, paving the way for the full establishment of Operation Bootstrap across the island. According to Virginia Sanchez Korrol from the Center for Puerto Rican Studies, Operation Bootstrap was based on 3 essential elements:
“1) industrialization by invitation: the inducement of American corporations to relocate in Puerto Rico in exchange for lucrative tax benefits;
(2) a cheap labor pool, educated in the English language and under a U.S. imposed curriculum;
(3) proposed emigration of over a third of the island’s population, a security measure to insure the plan’s viability.”
The US government in Puerto Rico enticed US companies by providing labor at costs below those on the mainland, access to US markets without import duties, and profits that could transfer to the mainland free from federal taxation. The Administration of Economic Development invited investment of external capital, importing the raw materials, and exporting the finished products to the mainland. To entice participation, tax exemptions and differential rental rates were offered for industrial facilities. As a result, Puerto Rico's economy shifted labor from agriculture to manufacturing and tourism. The manufacturing sector has shifted from the original labor-intensive industries, such as the manufacturing of food, tobacco, leather, and apparel products, to more capital-intensive industries, such as pharmaceuticals, chemicals, machinery, and electronics. Through this project, a rural agricultural society was transformed into an industrial working class.
Although initially touted as an economic miracle, by the 1960s, Operation Bootstrap was increasingly hampered by a growing unemployment problem. As living standards and wages in Puerto Rico rose, manpower-intensive industries faced competition from outside the United States.
As of 2005 the continental United States remains Puerto Rico's major trading partner, received 86% of Puerto Rico's exports and providing 69% of its imports.
