After Vote, Costa Rica Turns to Implementation of CAFTA-DR

By Marifeli Pérez-Stable and Fabian Borges-Herrero
Latin America Advisor November 14, 2007

After Vote, Costa Rica Turns to Implementation of CAFTA-DR

WASHINGTON, DC—On October 22, Costa Rica's Supreme Elections Tribunal ratified the referendum result in favor of the Central America-Dominican Republic Free Trade Agreement (CAFTA-DR). With a 60 percent turnout, 51.6 percent voted for the agreement and 48.4 percent voted against—a rather modest margin of nearly 49,000 votes in a population of four million.

CAFTA-DR's most immediate consequence will be the opening of Costa Rica's state-owned telecommunications and insurance monopolies to competition from the private sector and foreign investors. Protecting these industries from competition was a central rallying cry of the CAFTA-DR opposition. Labor unions from the Costa Rican Electricity Institute (ICE) and the National Insurance Institute (INS)—both state owned monopolies—were among the agreement's most vocal critics. Reforms will involve establishing independent regulatory agencies, opening markets to private and foreign competition, and freeing ICE and INS from administrative controls that would hamstring them against private firms. To be admitted into CAFTA, Costa Rica must approve these and other reforms—13 in total—by March 2008. The agreement's opponents, however, are using stalling tactics to delay the voting.

CAFTA-DR will bring minimal changes to Costa Rica's market access. The agreement makes permanent and slightly expands Costa Rican preferential access to the US market through the Caribbean Basin Initiative (CBI), which especially benefits the textile and tuna sectors. CAFTA-DR does enhance protection of investor rights, which should bolster Costa Rica's efforts to continue attracting foreign direct investment. In addition, CAFTA's approval paves the way for the country to join the rest of Central America in negotiating a trade agreement with the European Union.

Politically, the "Yes" vote saved President Oscar Arias from a premature lame-duck status 18 months into his term. He had made CAFTA approval a central issue of his platform in the 2006 election. Now, Arias can turn his attention to governing and, especially, healing the rifts that a divisive referendum campaign aggravated. Measures to compensate the sectors most threatened by CAFTA, for example, would reach across the aisle to the Citizens' Action Party (PAC), which campaigned to defeat the agreement after barely losing the presidency to Arias.  At the same time, the administration must pursue complementary policies—namely, improving the quality of basic and technical education, investing in physical infrastructure, and enhancing the business climate—that should allow Costa Rica to reap the most benefits from CAFTA.

Funding these measures without jeopardizing the country's fiscal balance will not be easy.  Costa Rica has long delayed comprehensive tax reform which, for the time being, continues to be politically unfeasible. Despite these financial constraints, the Arias administration must strategically approach CAFTA-DR to take advantage of the opportunities it creates and to lessen the challenges it poses. Otherwise, Costa Rica will neither bolster growth nor improve job creation, and the country's divisions will rankle.

Marifeli Pérez-Stable is Vice President for Democratic Governance at the Inter-American Dialogue. Fabian Borges-Herrero is a former staff writer for the Tico Times in Costa Rica.