Latin America Advisor

A Daily Publication of The Dialogue

Is Costa Rica’s Economy on the Right Track?

Costa Rica over the past five years has implemented the highest number of reforms of any country in Latin America in an effort to improve its business climate, according to the World Bank’s Oct. 27 “Doing Business 2016” report. However, the country’s economy posted its sixth consecutive slowdown in GDP growth in this year’s second quarter. Is Costa Rica on the right track to attract more investors and improve its business climate? How well is President Luis Guillermo Solís handling the economy? How strong are the country’s levels of investor and business confidence?

Alexander Mora, Costa Rica’s minister of foreign trade: “Costa Rica assigns high value to the continuous attraction of FDI. It is a priority area of action for the current administration, and a longstanding public policy in place since the late 1980s. We are a small country open for business, strongly committed to generating quality jobs and creative avenues to yield new opportunities for investment and growth. We believe that these tasks are of shared interest, and that government needs to address the trade of promoting sustainable development in close partnership with business. Our vision has rendered encouraging results. We have the region’s best education system and a high-quality health system; these are the lofty principles that set the foundation of our nation, and areas in which we continue to invest heavily. In Latin America, we are known for having the greatest potential for innovation and sophistication; and for being the first high-tech exporter of industrial products, as well as the top choice for establishing global business services centers; and in Central America and the Caribbean, we are the top country for future FDI. Over 250 high-tech multinationals with operations in our territory take advantage of our positioning and provide solid proof of the strong levels of business confidence that exist in our country. Our efforts to implement the highest number of reforms to improve the business climate in the past year offer evidence that we are on the right track to continue attracting investors. We will continue to direct our actions toward these objectives.”

Laura Chinchilla Miranda, former president of Costa Rica: “Costa Rica has sound and stable democratic institutions, a solid foreign investment and trade platform, and an educated and highly skilled workforce. Thanks to those conditions, we have become one of the strongest performers in Latin America. However, despite these strengths, we have some problems that are negatively affecting our economy’s competitiveness. These include the poor quality of infrastructure, excessive red tape and a fiscal deficit that continues to climb steadily. In order to continue to lead Costa Rica through the path of growth, and to overcome some of the aforementioned challenges, the previous two administrations—mine and that of Óscar Arias—put forward a series of bold initiatives. Among them: the negotiation of trade agreements with the largest economies in the world—the United States, Europe and China; the beginning of the accession process to the Pacific Alliance and the OECD; the opening of the telecommunications sector; an ambitious public investment program for the construction of port and road infrastructure; and an ambitious regulatory reform that allowed us to move up in the international rankings. President Solís’ administration has remained committed to ongoing efforts in attracting foreign investment, but that has not been the case with other policies. For example, the infrastructure projects are suffering delays, Costa Rica’s access to the Pacific Alliance was put on hold and necessary fiscal reforms were postponed. This last decision has the potential to undermine the country´s credit quality and constrain economic growth. Finally, the appreciation in the value of our currency confronted with the recent depreciation of other regional currencies is damaging the competitiveness of our export sector.”

José Antonio Muñoz, founding partner at Arias and Muñoz: “Costa Rica’s long-established track record of having the best human capital is the paramount factor in the country’s continued success in attracting foreign direct investment. Recently-released global health indexes in Costa Rica re-confirm that investors seeking high levels of education, productivity, innovation and a committed and healthy labor force should continue to look at Costa Rica as an ideal situs for their investments in the short and the long term. President Solís’ administration is to be commended for both continuing the work in regulatory improvement begun a decade ago and for the president’s dedicated efforts to meet with foreign investors and highlight the country’s advantages as a destination for international and regional investment. The administration has also allowed spaces for the productive sector to realize that social and economic progress are their responsibility. After very weak investor confi dence for the fi rst 18 months of the Solís administration, the last quarter of 2015 has seen investor confi dence surge. National and international investors alike decided that the country’s economic and social successes do not depend solely on government action but also on the entrepreneurial capacity of its people. Boosters to investors’ morale include the interest of low-cost carriers like RyanAir, Irelandia and Volaris to not only to start flying to Costa Rica but to make the country their regional hub. This, coupled with increased number of fl ights from new and established traditional airlines to the country’s two airports, are signifi cant developments for the increased number of companies making Costa Rica their regional headquarters. Increased interest in medical investigations and research based on Costa Rica’s world-class record and certifi cations after a six-year regulatory lull.”

Kevin Casas-Zamora, director of the Peter D. Bell Rule of Law Program at the Inter-American Dialogue and former vice president of Costa Rica: “Since falling into negative growth in 2009, the performance of the Costa Rican economy has been solid but unspectacular. This has not changed under President Solís. The IMF recently revised down its growth projection for 2015 from 3.8 percent to 3.0 percent. While this places Costa Rica second to last in Central America, it was not unexpected given the global slowdown and the headwinds that Latin American economies, in general, are facing. External confidence in the Costa Rican economy has not been greatly affected by this unremarkable performance or by Intel’s 2014 decision to shut down its manufacturing plant in Costa Rica. The country continues to attract significant flows of FDI (around $2.2 billion per year in 2013 and 2014) and, leaving aside electronic components, its exports grew just shy of 2 percent in the year up to September 2015. The real problem is domestic, where the business sector’s trust in the current administration has deteriorated sharply. This is the result of the general lack of direction of Solis’ administration, his perceived closeness to public-sector trade unions, and, most of all, his unwillingness to take credible measures to rein in a large and growing fi scal imbalance. The fiscal deficit is expected to reach 5.8 percent of GDP this year and nearly 7 percent in 2016, a clearly unsustainable path. The government’s inaction in the face of this pressing issue is far more consequential than the modest package of measures, which included an uncertain commitment to lower interest rates, that Solís recently announced to reactivate the economy. Local business’ lack of confidence is at the heart of the country’s inability to lower a stubbornly high unemployment rate (10 percent) and long-stagnant poverty figures."

David Gutiérrez, partner at law firm BLP: “Costa Rica is definitely on the right track to attract more foreign investment. It has done so for many years and remains so, in particular in the field of free zones. The country has a very strong record in terms of treatment to foreign investors and keeps benefiting from longstanding investment in education and health and from very stable and safe political and economic conditions. Costa Rica offers foreign investors strong institutions, real separation of powers and rule of law. It offers foreign citizens a very high quality of life for themselves and their families. It remains one of the world leaders in the attraction of FDI as a percentage of GDP. The challenges we have as a country include linking the ‘modern’ Costa Rica, the one that has embarked on the path of globalization and technology, with the ‘old’ Costa Rica, which is isolated from the world. Local businesses also need to benefi t more from exporters and foreign investors (i.e. sell them local products to manufacture exportable goods). Local investors should be offered the same facilities and conditions that foreign investors are offered. Local business people and entrepreneurs face never-ending bureaucracy, regulation, lots of red tape and other limitations that in some cases apply only to local investors. One practical solution would be to create a nationwide free zone, for both local and foreign investment. This will mean more and better jobs and clear connection and link between exporters and local manufacturing and services companies.”

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