The Flagstaff Institute and the World Economic Processing Zones Association (WEPZA) honored the Commonwealth of Puerto Rico for establishing the World's First Economic Processing Zones. Presentation of the award was made September 9, 2004 in San Juan to Hon. Carlos Vizcarrondo Irizarry, President, House of Representatives, and Sr. Antonio (Tito) Colorado, Former head of Puerto Rico Industrial Development Company (PRIDCO) and former Secretary of State of Puerto Rico during a conference of the Latin American Free Trade Zones Committee.

EDITORIAL:

What Puerto Rico Faced in Being First to Create EPZs in 1947
... and its Huge Success

Richard L. Bolin, Director
The Flagstaff Institute¹

In 1942 this Caribbean island part of the U.S.A. decided to industrialize. Teodoro Moscoso, age 32, was delegated to fly to Cambridge, Massachusetts and engage the help of a consulting company related to Massachusetts Institute of Technology. World War II was on and submarines were sinking ships traveling the 1200 miles to Miami or 1500 miles to New York, so import substitution was the strategy selected at first - cement, glass, and shoe factories were built by the socialist-minded government (with the direct support in the United States Congress of conservative Republican Senator Robert A. Taft - to show that bipartisanship existed at the time.)

After the War, development slowed as neither the government nor local firms were able to build exports. Beginning in 1947 the government decided to attract firms from the mainland USA to invest, and in 1951 it passed a tax exemption law as an incentive to foreign and mainland investors. It further created the Economic Development Administration (Fomento), headed by the now legendary Teodoro Moscoso to manage investment attraction, and the Puerto Rican Industrial Development Company (PRIDCO) to build infrastructure, factory buildings, and industrial parks throughout the island. By 1963 it had attracted 480 manufacturing firms to its 30 industrial parks.

The Impact of Fomento

In the 1930s, Puerto Rico was called the "poorhouse of the Caribbean". The average age at death of the Puerto Rican male was 37. The wage was $0.30 per hour. Only 2% of persons aged 20-24 were in Universities.

In 1940, per capita GNP was $154. By 1989 per capita GNP was $6060, the highest in Latin America. And the 20-24 age group had 60% in Universities. The average Puerto Rican male was living past 75 years.

From a manufacturing base employing 62,500 in 1953, job creation was 20,000 to 1960, of which 10,000 were in apparel and 3000 in electronics. By 1970 jobs grew another 55,000, 22,000 in apparel and 10,000 in electronics and instruments - all due to the efforts of Fomento and its EPZs. By 1989 Puerto Ricans owned factories employing 27% of 157,000 employees in manufacturing. [For more detail see: Puerto Rico's Economic Development Strategy and Structural Change, John R. Stewart, Jr. and Saul Chico Pamias, Journal of The Flagstaff Institute, Vol. XIV, No. 1, March 1990, p.1, ISSN 0146-1958]

What we have come to call the Economic Processing Zone was successful from the very beginning in spearheading industrialization in this first significant effort to alleviate human suffering in the Caribbean.

Duty-Free Zone

Since there was no tariff on goods going to or coming from the U.S. mainland, the whole island was a duty-free zone under US Customs control, and Customs kept separate statistics, which it does to this day. Any new factory exporting to the mainland had the same privileges and services as now available in EPZs around the world.

Tax Exemption

Since Puerto Rico was part of the USA, the tax exemption provisions were particularly effective - exemption from USA income taxes for 10 years. This was possible because under the political arrangement with the USA as it evolved from 1898 Puerto Ricans were US Citizens with complete freedom to move to the Mainland, but could not vote in Federal Elections if they were resident on the island. The principle of "No taxation without representation" freed island residents from US taxes. Of course, there were Puerto Rican taxes to be paid, but under the new laws, export industries attracted to the island were exempt from these also - at least initially.

Investment Attraction - Buildings

The innovations were 1) the promotion initiative of government run by Fomento, including 10 year tax exemption, and 2) the creation of industrial buildings ready for occupancy so that a potential investor would see that he could move in right away.

The young, bright Industrial Promotion Officer of Fomento was trained to take his client to the door of a new building, turn on the lights, step back and say, "This is your factory, señor." This latter lesson was learned early by practical experience - investors at first did not want to build their own buildings - but they wanted a building ready to move into and not have to wait 6 months for it to be built.

Since Puerto Rico had little industry, there was no stock of available industrial sites. And private investors on the island did not want to risk money in a speculative construction program that might not work. It was many years before Puerto Rican construction companies (e.g. Henry Rexach) and banks risked funds in new speculative buildings. So the government took the lead through PRIDCO with public funds.

A series of modular standard industrial buildings from 600 sq. meters up was developed by PRIDCO and these were built in many small communities of the Island to bring hope for development to the people. In metropolitan areas, 30 industrial parks were built to house 15 or 20 larger PRIDCO factories convenient to workers.

Investment Attraction - Promotion

Fomento opened several offices on the mainland (and later in Europe and Asia) and spent some $10 million per year on promotion by the late 1950's (equivalent to $70 million in constant dollars today). Its advertisements in mainland publications won prizes for excellence consistently over the ensuing years. It set up a development laboratory, supported education, and in 16 years, by 1963, had attracted 480 firms to the Island. By 1975 it had attracted 2000 companies.

Technology Transfer to Developing Countries

A Puerto Rican government expert (Alexander Firfer) was provided to Taiwan in 1960 to review their industrial development plans. He enthusiastically endorsed their plan to turn an artificial island in Kaohsiung Harbor into Taiwan's first EPZ. Another (Hu Barton) later advised the government of Indonesia to turn Batam Island, just offshore near Singapore, into a Free Zone linked to Singapore.

Puerto Rican EPZ knowledge was transferred in many ways besides these examples. Many visitors from developing countries, especially in the Caribbean, came to see how success was achieved - and were always welcomed. The consulting firm which was under contract to Puerto Rico continuously as development advisors from 1942 to 1962, Arthur D. Little, Inc., of Cambridge, Massachusetts, USA also learned the process and spread EPZ knowledge to many countries in later years, including to Jamaica, Cuba, Venezuela, Mexico, Central America, and the Dominican Republic by 1967.

Labor Union Support

In the early days the climate with labor unions was very good. The International Ladies Garment Workers Union (ILGWU) was supportive of Puerto Rico's Governor, Luis Muñoz Marin. One story went that Dave Dubinsky, head of the ILGWU, even went so far as to persuade two garment firms in New York to move to Mayaguez at the remote western end of the island when the very first two garment factories to be attracted there quit because of tough conditions there.

But later when the International Union of Electrical Workers (IUEE) struck the Westinghouse plant at an industrial park in the San Juan area and tried to shut down all the other industries in the park at the same time, relations became strained.

So Puerto Rico had a key role early in the creation of EPZs B especially the provision of buildings in advance, and in creating successful techniques of investment attraction long before the free zone at Shannon, Ireland was founded in 1959. And many people visited Puerto Rico and learned from it, as they do to this day.

Training Investors and Managers

Perhaps the most important contribution to American industry made by the Puerto Rican experience was the accustoming of US industry to offshore operations- it was the incubator. Many American companies first learned how to operate offshore in Puerto Rico and became confident of their abilities - making them good candidates for further expansion overseas. The culture and language were different from the mainland, the climate different, the ocean and air logistics were different - hardly a problem was later encountered elsewhere in the world that American industry had not already solved at some point in Puerto Rico.

Conrad Hilton went international with his hotels based mainly on the enormous success of the Caribe Hilton at San Juan, built by PRIDCO to have an attractive hotel for potential investors. (In about 1951, the profits of the Caribe Hilton, in which Hilton Hotels shared half, were greater than those of the rest of the Hilton Hotels chain put together).

And, finally, young Puerto Ricans could be trained at plants of General Electric Company (GE) and many others to become engineers, technicians and managers. The later impact of this was that Intel located its semiconductor chip factory in Barbados only because the final inspection and quality part of the factory was in Puerto Rico where it could meet specifications. There were not enough engineers in Barbados.

Also, plant managers from Puerto Rico spread to other regions as their companies developed. The Rockwell integrated circuits plant at Mexicali, Mexico was managed 25 years later by a man who began his career at 16 in a plant in Puerto Rico and moved up through the ranks as Rockwell paid for his education.

Sea-Land

In the 1950s, Malcolm McLean, a Southern US truck fleet operator, created containerized shipping on the high seas. His company, Sea-Land, now with Maersk, devised a system using special self-loading ships to pick up about 500 35-foot containers and cut port turn-around time from 3 days to 17 hours for a shipload. Sea-Land created the world's first container port at Newark, New Jersey, USA. The system, now using land-based cranes and special ports, is worldwide - and the latest ships carry the equivalent of 5000 40-foot trailers today.

After acquiring the Waterman Line and engaging in US Intercoastal trade, Sea-Land's first offshore service was to Puerto Rico. The first ship arrival caused a major strike at the port of San Juan because only nineteen workers were required to unload and reload the ship in 17 hours instead of 200 workers for 3 days. The government recognized it would have to deal with dock labor, but that the new invention would be extremely important to the island and must not be stopped.

The first ship had to return to Newark and unload its original cargo. The cargo had to be repackaged for standard service and some of it got to San Juan as late as 3 months afterwards.

But the government made a detailed survey of the port dock workers, found that of the 2000 listed dock workers only about 800 workers really depended on the port to feed their families, and gradually reduced the number of occasional workers, high school students, etc.

Sea-Land returned to San Juan under a system where they paid 17 un-needed workers to sit near the ship for the duration of its stay in port, but not interfere with the unloading process. It saved Puerto Rico millions of dollars in later years. So Puerto Rico gave the world another lesson - how the government can deal with changing technology which displaces workers. It was not easy, but the lesson was learned by Sea-Land, which spread it to the world.

Educating the World to Build EPZs

The Shannon Free Zone
Notwithstanding the rightful claim of Puerto Rico to originality in EPZs, Shannon has been an important innovating EPZ from its beginning, reaching 8000 employees in its early years and having about 5000 today after moving to high-tech. It must be credited with spreading its EPZ knowledge around the world. Its development company has done studies for UN organizations in many countries. The regular course it offers in EPZ development and management has been valuable to developing countries to learn how to get started.

EPZA, Kaohsiung, Taiwan
Also, the free courses given regularly by the Export Processing Zones Administration at Kaohsiung, Taiwan, ROC have been equally helpful - and have been the basis for the education and startup of almost all the zones in Asia. South Americans and Africans now regularly attend Taiwan EPZA courses. Taiwan's EPZs reached 90,000 workers in the early years and now have about 50,000 as their factories moved to high-tech. Dr. K. T. Li, honored by WEPZA in 1989 as the "Father of Export Processing Zones" was the principal driving force in the creation of Kaohsiung's EPZs.

The Outstanding Success of Mauritius 1970-2000

Mauritius is an outstanding example of success in the African region. In the 1960's, Professor of Chemical Engineering Edouard Lim Fat, of Rose Hill, Mauritius, reported on the impossibility of relying solely on sugar for economic development and suggested the creation of the Free Zone. Based on his efforts the Zone was created in 1970. In subsequent years factory buildings were constructed and the promotion program begun. The concept was for a regime-type Free Zone in which factories could be located in many places on the island and still receive free zone benefits - not very dissimilar from that which Mexico created in 1965.

When, in 1979, PR China signaled its desire to re-integrate Hong Kong in 1997, a flood of garment producers from Hong Kong left the colony for Sri Lanka and created 30,000 jobs there in 6 months. The President of Sri Lanka said, "Stop - no more Hong Kong garment factories." and the overflow went to Mauritius, the only other major promoter of Free Zones at that moment within reach. Timing was perfect. In the following years Mauritian investors entered the garment business in large numbers and controlled 44% of the factories by about 1985 when Professor Lim Fat was re-elected Chairman of Mauritius Export Processing Zone Association (MEPZA). His service as consultant on Free Zone development to UNIDO and others in Africa and elsewhere has helped many countries. Mauritian heavy investment in Madagascar is a recent success.

I hope you enjoyed this picture of the early days and remember that Puerto Rico originated much that is reality in Economic Processing Zones today. No wonder it is still very active in leadership of Zones everywhere.

¹ Mr. Bolin was an invited speaker at the founding of WEPZA by UNIDO and 29 countries at Manila, Philippines February 3, 1978 and has been an advisor since that time. He is Director of The Flagstaff Institute which WEPZA selected to manage its Secretariat as it was privatized in 1985 and became Director Emeritus of WEPZA in October 2003. Since 1978 WEPZA has attracted EPZ members from 60 countries with operations in a total of 66 countries. Mr. Robert C. Haywood is Director and CEO of WEPZA, Associate Director of The Flagstaff Institute and President of International Parks, Inc., a consultancy.
 

EDITORIAL: THE WEPZA FAMILY

Whole countries have come out of poverty only through using EPZs since 1950 – Puerto Rico, Taiwan, Singapore, Ireland, Mexico, Korea, Dubai, UAE and currently Coastal China. Mexico alone created one million export worker jobs with our help in the last decade in their maquiladoras which are their version of EPZs. At least 40 other developing countries are on their way to success through intelligent application of EPZs. The key is their efficiency in their freedom to access the Global Market through Global Production and Added Value inside their territories.

There is only one organization in the world which has consistently and effectively encouraged EPZs since 1978 and that is WEPZA, the independent non-profit private World Economic Processing Zones Association. We are now an organization of 40 of the world's leading EPZs with 150 production sites in 38 countries and with 800,000 production workers. WEPZA has published journals, books, and 18 conference memoirs with a wealth of practical and statistical information about EPZs. * See our website at http://www.wepza.org. To counter the false "job loss" arguments of trade unions (really "job upgrades") and defend against rising trade-obliterating protectionist moves of rich countries, WEPZA knowledge is essential.

WEPZA is poised to lead both poor and rich countries to their wealthier destinies through research, education and cooperation in the next hundred years. Corporations with global ambitions, countries which yearn to be serious about successful development, and world multilateral organizations which want to raise the social and economic lives of millions will do well to heed our message and aid us when you can. The WEPZA Family welcomes you.

Sincerely yours,

Richard L. Bolin
Director Emeritus, Secretariat

* Many of the articles from the memoirs are available at the Members Only section of this website.