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ECONOMIC STAGNATION AND POLITICAL DEADLOCK, 1976-1992 The 1974-75 recession had a lasting impact on Puerto Rico. It marked the end of the rapid postwar expansion. Real yearly gross national product growth fell from7 percent in the 19603 to 3.3 percent in the 19703 to 2.1percent in the 19803. The official unemployment rate had never dipped below 10 percent, but by 1980 it had risen to 17 percent. A further recession in 1981-83 raised it to 23.5 percent.1 These numbers, combined with a 43percent labor force participation rate, were clear indexes of the incapacity of the colonial economy to secure an adequate source of income for a sizable portion of the population. As in the past, unemployment was higher in the interior and in small towns. Only the influx of federal funds and an increase in government employment prevented greater hardship for many. Between1970 and 1990, federal transfers to individuals in Puerto Rico—through food stamps and other programs—rose from $500 million to $6 billion. Their share of personal income went from 15percent to 30 percent.2 Meanwhile, Estado Libre Asociado government employment (not including municipalities and public corporations) more than doubled from 106,000 in 1970 to 222,000in iggo.3 In that context, anew statehood movement, armed with a newdiscourse and led by Carlos Romero Barcelo,now rose to become an equal partner/opponent in a political deadlock with the once invincible Partido Popular Democratico. But before the elections of 1976 placed Romero Barceloin the governor's mansion , PPDgovernor Rafael Hernandez Colon had to immediately deviseways of responding to the 1974-75 shock. Some of his initiatives shaped the evolution of the Puerto Rican economy during the next two decades. It is to this thatwe now turn our attention, before examining the riseof the pro-statehood Partido Nuevo Progresista under Romero Barceloand the conflicts that it provoked. 13 The Age of "Section 936" Faced with a looming fiscal crisis, in 1974 the Hernandez Colon administration appointed a commission led bywell-known economist James Tobin to prepare a report on Puerto Rico's finances.Tobin's Report totheGovernor included reflections on long-term trends and recognized that "poverty and unemployment are still immediate problems for a large portion of Puerto Rico's population." It admitted that "dependence" was an appropriate description of the Puerto Rican economy: half of the "tangible reproducible assets" located in Puerto Rico were "externally owned."4 This meant that a considerable portion of the income generated was not reinvested on the island. Furthermore, the report warned that Puerto Rico's ability to attract U.S.capital wasbeing eroded. In the past, U.S. capital had been attracted by low wages, unrestricted access to the U.S. market, and the security afforded by the political link with the United States. But other areas could offer lowerwages, many were gaining access to the U.S. market, and not all were insecure or unstable. The report concluded that Puerto Rico should formulate an economic program less reliant on U.S. capital . Yet, the insular government responded to the crisis by deepening its tax exemption policy, confirming its commitment to U.S. direct investments as the agent of Puerto Rico's development. In 1976, the Hernandez Colon administration successfully lobbied Congress to amend Section 931 of the U.S. Internal Revenue Code, which regulated the operations of U.S. corporations in U.S. possessions, including Puerto Rico. Under Section 931, U.S.manufacturing corporations in Puerto Rico could place their profits in island banks or move them to other possessions and, upon liquidation of their operations, transfer them to the mainland without paying federal taxes. While waiting for the best moment to repatriate their profits, some corporations moved their funds to Guam (another U.S. possession) and used them to speculate in the rising Eurodollar market. PPDlobbyists convinced Congress that allowing U.S. corporations to transfer their profits taxfree to the mainland at any moment (without having to liquidate their operations on the island) would recuperate millions of wayward dollars for the U.S. economy while enhancing Puerto Rico's industrial project. The changes were embodied in a new Section 936of the Internal Revenue Code, adopted as part of the Tax Reform Act of 1976. The corresponding "936 corporations" were to become the mainstay of the Puerto Rican economy until the phasing out of Section 936 in 1996-2006. Most such operations in Puerto Rico functioned as subsidiaries of a U.S...

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