Transcript Part 2 - Economy and Environment

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 Environment
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)
• 1960s - 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)
• 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
– 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”
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1998 GDP $10.5bn, per capita GDP $3,137
1999 growth estimated at 8%
1998 Public Sector debt $4bn (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 1950s and 1960s
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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
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
SPP Costa Rica Development Program, Spring 2000
Part 2 – Economy and Environment
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
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
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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
(AmCham), 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