Puerto Rico has changed from an agricultural economy, based primarily on sugar, tobacco, and coffee products, to a thriving modern industrial and services oriented economy. In 1940, agriculture represented 33.7 percent of total net income, while manufacturing had 12.8 percent of the total. Nevertheless, in 2002 agriculture composed 1.0 percent of total net income while manufacturing made up 45.7 percent of the total. The financial sector is the second largest sector, with 15.0 percent of total net income. The transformation towards the industrial and services sectors has taken place in a period of over four decades. During this time structural changes have also occurred, as is the case of the manufacturing sector. This sector gradually changed from one of labor-intensive industries in the first stages of development to one of capital-intensive industries. In the last ten years this structural change intensified with the significant reduction of labor-intensive industries and the development not only of capital-intensive industries but also of knowledge intensive industries, such as biotechnology.
The new century poses new challenges that need to be addressed with innovative strategies, which would allow the economy to evolve and compete in today's globalized economy. The country has enjoyed fiscal autonomy with respect to the United States since the creation of the commonwealth, which implies that residents of Puerto Rico do not pay federal income taxes, and the local authorities have discretion to design tax incentives to attract foreign direct investment. This major tool has allowed different administrations to develop the manufacturing and services sectors of the economy in a fairly short amount of time, and adapt it to the different global challenges it has faced along the last half a century. In addition, the authorities have begun to implement a more efficient system to deal with regulations and permits, helping to the development of new businesses and to the entrepreneurial climate of the country.
Puerto Rico does not only enjoy fiscal advantages, but also its physical infrastructure and its human capital are highly developed. The country has a highly developed highway, ports and airports systems which allow a fast movement of merchandises across and beyond the Island. It has also a state-of-art communication network. Moreover, its location in the Caribbean makes the country a perfect place to develop an even larger infrastructure for a trans-shipment port with its respective value-added zones. In terms of human capital, the Island has a highly sophisticated and bilingual workforce, ready to face the continuous transformation of the economic environment. For all these reasons, the private sector with the help of the public sector has developed in the country five clusters: pharmaceutical, biotechnology, medical devices, communications and information technology, and health services. These clusters are helping Puerto Rico to deal more efficiently with all the new upcoming challenges.