Since the second half of 2006, the Puerto Rican economy has slowed. The GDP growth has been between 0.7%-1% over the last year (although some economists believe the island has recorded negative growth) and the forecast for 2008 is only marginally better. The Commonwealth’s government has been dogged by debt and shrinking revenues while demands to address social and infrastructural needs increase. In 2007, the government passed a sales tax (5.5%) and began a system of collecting real estate taxes to address the government’s budget revenue demands. The government’s proposed $9.2 billion fiscal 2008 budget includes a $261 million reduction in general fund expenditures relative to the fiscal 2007 budget, and a $101 million reduction compared to expected actual year-end expenditures. According to reports, the projected $150 million budget shortfall is expected to be covered with proceeds from the sale of real estate assets. There is a great deal of debate as to whether either of these fiscal policies will right the ship. It is argued that the sales tax really hits the poor (Puerto Rico has nearly 10% unemployment) and that the real estate taxes have been unfairly assessed against many of the tax-free manufacturing and related businesses that form the backbone of the economy. Long before there were “maquilladoras” in Latin America, Puerto Rico had established a tax-free system that allowed US mainline firms to invest in factories designed to produce items for export. The attraction was that setting up the factories was relatively easy compared to other countries and that the profits could easily be repatriated to the US. This incentive based system led to a transformation of the economy with electronics, textiles and pharmaceutical manufactures becoming important contributors, displacing traditional agricultural industries. The impact was a decade long spurt of direct investment from not only the US companies, but European companies as well. The new manufacturing led to a more diverse export base (although the US is still far and away the main trade partner) that included Europe. However, the manufacturing boom may have peaked in 2006. In 2007, AeA, the nation’s largest technology trade association, issued a report on the High-Tech industry in the US. According to the report, high-tech goods exports from Puerto Rico totaled $2.9 billion in 2006, climbing $154 million since 2005. The report noted that, “over half of all tech exports and over a tenth of all exports from Puerto Rico were in the computers and peripheral equipment sector alone.” More recently the news hasn’t been positive. For example in 2007 a number of multinational pharmaceutical companies announced plans to downscale their manufacturing presence in Puerto Rico. They are not alone, as multinational manufacturers have begun to look to elsewhere, symptomatic of a changing economic environment worldwide. Puerto Rico has been battling for multinational manufacturing investment and export markets with Asian countries like China, Taiwan, Hong Kong, Macao and now Southeast Asian nations, like Vietnam and Indonesia. But what has probably hurt Puerto Rico the most is the emergence of Western Hemisphere FTA (Free Trade Agreements). With other Latin American nations inking FTAs with the US, Puerto Rico’s exclusiveness is diminished. This comes at a time when the concerns over the future of tax incentives, is paramount with foreign-based manufacturers. But there are some positive signs. Tourism has managed to post positive numbers (in comparison to other competing foreign destinations) largely because of the US mainland familiarity with the island. Secondly, the economy is just beginning to show a little life. Latest data show that retail sails started to recover in Q407. According to the Puerto Rican Planning Board, retail sales growth came in at 4.2% y-o-y in October 2007, marking fastest rate of expansion in almost two years. Overall, the economy is weathering the storm and addressing some painful economic choices. Whether the economy will emerge