COSTA RICA SPP Costa Rica Development Program Spring

COSTA RICA SPP Costa Rica Development Program, Spring 2000

PART 2 – ECONOMY AND ENVIRONMENT Will Cobbins III Omorotimi Lewis Catherine Lomax Noam Glick SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Rainforest Background • 100 years ago, rainforests covered 2 billion hectares (14% of earth’s land surface). Today, only half remains. • At current rate of destruction, world’s rainforests will vanish within 40 years. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environmental Protection in Costa Rica • Costa Rica has one of the world’s best conservation plans • One quarter of the country is under some form of official protection • Has won numerous awards for their environmental efforts • Still, almost entire country has been deforested outside of national parks/reserves SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Causes of Deforestation • Logging, ranching, and development of large-scale commercial agriculture to blame (especially cattle ranching) • 1960 s - large tracts of virgin forest were destroyed to make room for cattle SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Government Policies to Address Deforestation • “Paradox of good intent and poor application” • Alleged mismanagement of reserves and refuges • Forestry Directorate (now Ministry of Natural Resources) accused of being inefficient SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Government Policies (cont’d) • 1970 s - government bans export of more than 60 diminishing tree species; becomes illegal to cut timber without proper permits – Illegal deforestation nevertheless continues – Rafael Calderon administration friendly toward agricultural expansion - eliminates key clause in the forestry law designed to protect remaining forests • Government promotes reforestation with tax breaks – doesn’t restore old growth trees SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Government Policies (cont’d) • Land set asides – won worldwide admiration with national park creation in 1970 • 10. 27% declared “inviolate of a land once compared to Eden” • 17% set aside as forest reserves, “buffer zones”, wildlife refuges, and Indian reserves – Currently, there are 20 national parks, 8 biological reserves, 26 protected zones, 9 forest reserves, and 7 fauna sanctuaries SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Government Policies (cont’d) • International efforts – A plethora of conservation groups and projects – Debt-for-nature swaps (e. g. Nature Conservancy) • Reorganization of management of protected areas – each conservation unit (by ecology type) will be able to procure international funding and manage its own budget SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment “Economic Snapshot” • • 1998 GDP $10. 5 bn, per capita GDP $3, 137 1999 growth estimated at 8% 1998 Public Sector debt $4 bn (40% GDP) GDP—composition by sector: agriculture: 15% industry: 24% services: 61% (1997) • Unemployment 5. 6% (1998 est. ) SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment The 1950 s and 1960 s • • • Move away from dependence on agriculture State-led industrialization Highly protectionist model CACM membership, 1963 Incentives to attract foreign capital and encourage local production • Promoted growth but increased trade deficit SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment 1970 s and early 1980 s • War on poverty • Weaknesses of ISI model become apparent • Crisis in early 1980 s – In 1982 Inflation was 90% and GDP fell by 7. 3% – Debt Shock – Huge devaluation of the colon SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment 1980 s and 1990 s • Followed structural adjustment programs • Gradual reduction of the role of the state in the economy • Export-led industrialization • Recession in mid ‘ 90 s • Promotion of FDI: public infrastructure, hi-tech industries • Trade liberalization • Success of tourism • Fiscal deficit SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment General Policy Framework • Free market system with open trading regime • Public sector monopolies in electricity, telecommunications, petroleum, and insurance • 4. 5% growth rate in 1998 (real growth rate - 5. 5%) • Exchange Rate System: “crawling peg” SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Economic Overview • GDP -- composition by sector: agriculture: 15% industry: 24% services: 61% • Land use -arable land: 6% permanent crops: 5% permanent pastures: 46% forests and woodland: 31% other: 12% SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Economic Sectors • Industrial-food processing, textiles and clothing, construction materials, fertilizer, plastic products • Agriculture-coffee, bananas, sugar, corn, rice, beans, potatoes, beef and timber SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Balance of Payments • • Exports (1998)-- $3. 9 billion Imports (1998)-- $4. 5 billion Roughly a trade deficit of $600 million Deficit peaked in 1997 to $1. 1 billion (exports grew by 7. 7% but imports increased 16. 7%) • Decline in tradition agricultural exports due to El Nino but was offset by nontraditional exports including free zone and maqila exports (19%) and tourism (6. 5%) • International reserves, however, grew due to strong capital inflows and tourism SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Free Trade Arrangements • Costa Rica is a member of the Central American Common Market (CACM) with El Salvador, Guatemala, Honduras, and Nicaragua • Most goods (with the notable exception of agricultural products) are traded with no duties • Common External Tariff (CET) ranging from 5 to 20 percent • Participating in Free Trade Area of the Americas (FTAA) with targeted implementation in 2005 SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Political Stability • Costa Rica maintains a strong system of democratic government and demilitarization. • President Miguel Angel Rodriguez has been very aggressive in making Costa Rica attractive to foreign direct investment, especially for public sector projects. • President Rodriguez is also actively tackling the country’s large internal debt. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Skilled, Well-Educated, Highly Productive Workforce • The literacy rate is over 94%. • Elementary and secondary education is free. • Several universities available -- three in the Central Valley alone. Tuition costs are low and scholarships are widely available. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Privatization • Movement to liberalize economic sectors traditionally reserved for the public sector (i. e. telecommunications, energy). • New system of concessions developed in 1998 to woo investment. • Despite political resistance, efforts are still underway to liberalize the public sector. • Example: US consortium recently won a government concession to manage San Jose’s international airports. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Existing Presence of Other Multinationals • Nearly 85 US Fortune 500 companies operating in Costa Rica including, Baxter, Intel and Proctor and Gamble. • Many of these firms have developed a presence in the country in the last 10 to 25 years. • Costa Rican-American Chamber of Commerce (Am. Cham), boasts over 900 individual members, and over 300 corporate members. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Absence of Capital Controls • Currency conversion is relatively easy in Costa Rica. There are few problems converting the Colón to US dollars. • NOTE: Interest rates are also high which is good for attracting foreign portfolio investment. However, a lowering of interest rates will likely increase demand for imports and may encourage capital outflows in coming months. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Agreeable Climate and Living Conditions · Costa Rica is centrally located within the Western Hemisphere and offers very attractive living conditions. · Over 25, 000 US citizens in the country. · Robust growth in tourism. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Trade Agreements • Costa Rica enjoys trade benefits under the Caribbean Basin Initiative (CBI). · Will continue to receive benefits under Generalized System of Preferences (GSP), if renewed by the US and other WTO members. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Regulatory Environment • Regulatory environment fairly transparent, although some bureaucratic bottlenecks. · Foreign firms accorded the same treatment as domestic firms (National Treatment and MFN). · Some sectors currently closed to private investment (i. e. public health and police services). SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Problems for Investors • Generous worker benefits programs make Costa Rica less attractive to investors seeking cheap, unskilled labor. • State-owned monopolies make it difficult to attract foreign investment in infrastructure and maintenance improvement projects. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Problems for Investors • Chronic current account and public sector deficits also detract from FDI, notwithstanding dramatic reductions to external debt service as a percentage of GDP which have improved Costa Rica’s overall investment ratings. • Investors strongly encouraged to retain attorneys. Attorneys needed when handling hostile squatters, clearing titles to lands, and expropriating land. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Problems for Investors • Union complaints about unfair labor practices to the AFLCIO and the International Labor Organization (ILO). • Intellectual property rights are fairly established, although disputes over patent protection. Costa Rica is working on new legislation to address these issues. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Intel Corporation • Opened $US 200 million microprocessor facility. • Represents a significant portion of the total new foreign direct investment for 1998 ($US 530 million). • Intel to work with Costa Rican Technological Institute (ITCR) to train workers in skills required for Intel’s hiring demands over the next five years. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment International/Multilateral Investment • Increasing business transactions with the US and Mexico to ensure share of the global market. • Looking forward to signing free trade agreements (FTAs) with US and Mexico. • Acceded to the WTO in 1995. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment International/Multilateral Investment · Joined the International Monetary Fund (IMF) in 1948. · No outstanding purchases and/or loans with Fund. · However, in recent Article IV Consultation, Costa Rica encouraged to improve tax revenue. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment International (Cont’d) • Several World Bank, the International Finance Corporation (IFC) and the Inter-American Development Bank (IBD) projects. • Examples of World Bank projects include: Transportation Sector Project ($US 48 million); and Basic Education Project ($US 23 million). • Examples of IFC loans include project financing for a cellular telephone project and construction and operation of a bulk-blending fertilizer plant. SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment International (Cont’d) • Project financing also available domestically through local banking systems. • US private banks as guaranteed by the Export Import Bank of the United States (EX-IM) and the Overseas Private Investment Corporation (OPIC). SPP Costa Rica Development Program, Spring 2000

Part 2 – Economy and Environment Conclusion • Poised to benefit from increased international trade. • Political stability, government concessions, attractive to investment, especially in the high-tech sector. • Skilled and productive workforce, pleasant climate and strategic location in the hemisphere. • Further structural reforms and reduction of public debt needed. SPP Costa Rica Development Program, Spring 2000