COSTA RICA

1
COSTA RICA
2
PART 2 ECONOMY AND ENVIRONMENT

• Will Cobbins III
• Omorotimi Lewis
• Catherine Lomax
• Noam Glick

3
Rainforest Background

• 100 years ago, rainforests covered 2 billion
  hectares (14 of earths land surface). Today,
  only half remains.
• At current rate of destruction, worlds
  rainforests will vanish within 40 years.

4
Environmental Protection in Costa Rica

• Costa Rica has one of the worlds 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

5
Causes of Deforestation

• Logging, ranching, and development of large-scale
  commercial agriculture to blame (especially
  cattle ranching)
• 1960s - large tracts of virgin forest were
  destroyed to make room for cattle

6
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

7
Government Policies (contd)

• 1970s - 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
  
• doesnt restore old growth trees

8
Government Policies (contd)

• 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

9
Government Policies (contd)

• 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

10
Economic Snapshot

• 1998 GDP 10.5bn, per capita GDP 3,137
• 1999 growth estimated at 8
• 1998 Public Sector debt 4bn (40 GDP)
• GDPcomposition by sector agriculture 15
  industry 24 services 61 (1997)
• Unemployment 5.6 (1998 est.)

11
The 1950s and 1960s

• 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

12
1970s and early 1980s

• War on poverty
• Weaknesses of ISI model become apparent
• Crisis in early 1980s
• In 1982 Inflation was 90 and GDP fell by 7.3
• Debt Shock
• Huge devaluation of the colon

13
1980s and 1990s

• Followed structural adjustment programs
• Gradual reduction of the role of the state in the
  economy
• Export-led industrialization
• Recession in mid 90s
• Promotion of FDI public infrastructure, hi-tech
  industries
• Trade liberalization
• Success of tourism
• Fiscal deficit

14
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

15
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

16
Economic Sectors

• Industrial--
• food processing, textiles and clothing,
• construction materials, fertilizer, plastic
• products
• Agriculture--
• coffee, bananas, sugar, corn, rice, beans,
• potatoes, beef and timber

17
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

18
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

19
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
  countrys large internal debt.

20
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.

21
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 Joses international
  airports.

22
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
  (AmCham), boasts over 900 individual members, and
  over 300 corporate members.

23
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.

24
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.

25
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.

26
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).

27
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.

28
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
  Ricas overall investment ratings.
• Investors strongly encouraged to retain
  attorneys. Attorneys needed when handling
  hostile squatters, clearing titles to lands, and
  expropriating land.

29
Problems for Investors

• Union complaints about unfair labor practices to
  the AFL-CIO 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.

30
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 Intels hiring demands over the next
  five years.

31
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.

32
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.

33
International (Contd)

• 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.

34
International (Contd)

• 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).

35
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.