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The Costa Rican Economy – Where is it headed ?

by rpetersen
The Costa Rica Economy

The President of Costa Rica Luis Guillermo Solis Rivera was elected in May of 2014 with 77.99% of the electoral vote.   He was elected to the Presidency as the candidate for the Citizens Action Party (Partido Acción Ciudadana – PAC) which is the first time this political party holds the executive branch of the government.  The PAC party ran on a campaign of change promising a more transparent and efficient government administration.  Article 5 of the bylaws of the PAC indicate that its objective is “the development of democracy, defense of freedom, promotion of justice and the common good in order to promote the harmonious development of the country”

President Solis took office with high hopes after replacing Laura Chinchilla who left office with the lowest approval rating of any Costa Rican President.   As a result incoming President Solis stepped into office with Costa Rica Fiscal Defecita country where unemployment was growing reaching 8.5% by the time he took office.  The government fiscal deficit was close to 6% of GDP which is the highest in the history of Costa Rica.  He also inherited a country where the cost of living is extremely high. The State of the Nation report indicates that the cost of living in  Costa Rica is 20% higher than the average in Latin America.

In order to finance its expenses the government had been borrowing from
external sources accumulating debt that is close to 40% of the GDP and could grow to 58% of GDP according to the State of the Union report by 2019 if old government spending habits continue.

To put the icing on the cake, just as President Solis took office Intel one of the largest employers in Costa Rica announced that they were shutting down their Costa Rica manufacturing facility.   The main reason was that the costs of  operating in Costa Rica were too high.  That was followed by an announcement from Bank of America that is also was closing its Costa Rica operation.  The total jobs lost from these 2 operations was close to 5,000.   The challenge of this government is to ensure that Costa Rica is a competitive location for foreign investment.  Traditionally Costa Rica has been one of the largest recipients of direct foreign investment in Central America and the Caribbean.   However, Costa Rica cannot take this for granted by doing nothing.   The world is becoming highly competitive and countries that embrace technology and facilitate business growth will have a clear advantage.  Costa Rica needs to send a signal to  foreign investors that Costa Rica is a hospitable environment for their investment capital.

So.  Welcome Mr. President Solis and what are you going to do now ?  The expectations were high.  His temporary salvation was the FIFA World Cup Soccer Tournament in Brazil where the Costa Rican soccer team was the underdog but performed magnificently. The country was captivated with soccer and nobody cared about anything else.

cr_solisministrosOnce the fervor of the World Cup was over then the focus once again turned on the President and what he was going to do to stimulate a slowing economy. His first actions were missteps when scandals broke out about appointments he had made to key government Ministries. The learning curve for the new government has been steep and the population has been losing its patience ever since.  When he was asked about the missteps his response was “it is not the same thing to see the dancer from a distance than to actual dance with it” which translates to  “I did not see this coming”. 

The Political Action Party (PAC) of which President Solis is a member includes in its party bylaws a statement that indicates that the Party “will tenaciously fight all forms of political corruption to safeguard public resources and avoid competitive disadvantages”  As his party and cabinet Ministers took over government agencies they were probably overwhelmed with the amount of  corruption they were uncovering which paralyzed them.  This combined with the lack of management experience for many of the appointees did not help either.   Almost 50% (10/19) of the cabinet ministers were involved in some sort of contention or scandal during the first year of government.

President Solis won the election based upon a call to “change”.  However once he took office all he has been doing  is putting out fires and the only changes that have occurred are the shuffling of new Ministers in the Cabinet to replace the ones originally named.   It has been more than a year since he assumed the office of the Presidency and his approval ratings have been dropping significantly.

The Citizen Action Party (PAC), the Presidents political party, is itself  internally fragmented between those that want a centrist government position and those that want the party to swing way more to the left to align itself with the left leaning Frente Amplio party.  As a result of this division the President has lost the backing of some of his own legislators.

cr_macroeconomicThe common thread among the business community in Costa Rica is that business startup and entrepreneurship have been stifled by an ever growing myriad of government bureaucracy. I have been living and working in Costa Rica for 25 years and this is about as bad as I have seen it.  The government bureaucracy just grows out of control and to justify increased budgets  and spending they just pass new regulations and impose taxes which in turn put pressure on local businesses.  When it was inexpensive to live in Costa Rica I think we were more tolerant of government inefficiencies, incompetence and the lack of infrastructure.  We just absorbed that added cost.  With an expensive country this option is no longer acceptable and the inefficiencies of the government cannot be accepted either.  The Global Competitiveness Report ranks Costa Rica 93/144 along side Ethiopia and Uganda.

cr_infrastructurerankingThe Global Competitiveness Report also ranks Costa Rica next to Montenegro and Bulgaria when it comes to infrastructure.  How can a country pretend to enter the competitive global market with a dilapidated infrastructure ?  The road infrastructure is collapsed and there is no long term planning to build alternative transportation networks such as railways or a subway system. 

The World Bank recently published that Costa Rica had improved in its “Ease of Doing Business Category”  jumping form 83 to 58 by implementing technology to expedite the formation of companies and construction permitting process.   Those procedures were implemented before President Solis came into office and he will need to continue that trend to ensure that the rankings continue to improve.  However, when it comes to protecting investors Costa Rica ranks a pitiful 181 right next to Venezuela, Liberia and Palau.   In the category for  enforcing contracts Costa Rica ranks number 121 next to Mali.  How can this happen in the most educated and democratic country in Latin America ?

Every developed country clearly understands that a well developed infrastructure in roads, rail, airports and ports is necessary to attract business and keep the cost of moving and transporting goods as low as possible to make it competitive.   Costa Rica seems to have the  innate inability to execute the large infrastructure projects that are required.  When it does move forward on an infrastructure project  it administers it badly which results in large cost overruns and a waste of  the limited public resources that it has available.   According to a recent article the cost of building highway 27 in Costa Rica cost 19 times more than it does to build a highway in Europe.   Highway 27 cost US$ 3.4 million dollars per kilometer compared to US$116,000 in Germany, and US$215,000 in Spain.

The danger with this  government mismanagement is that the two areas where Costa Rica has traditionally ranked high which are education and health care can easily be threatened by a slow performing economy.  Costa Rica consistently ranks high on the Happy Planet Index ranking (1/151) in part because of the high life expectancy and well being of the population.  This is due to the health care system that Costa Rica adopted in the 1950’s.  When you combine good access to medical care with a free educational system and great weather it is not difficult to understand why Costa Rica ranks high on the Happy Planet Index rankings.  However,  If the Costa Rica economy falters then the taxes and assessments to the business community which pays the health care system contributions will come under pressure.  For the last ten years experts have issued warnings that the Costa Rica Social Security System (CCSS ) is heading for problems if it does not revert the practices of the past.  The Pan American Health Organization (PAHO) pointed out several years ago that the exorbitant increase in the number of employees to almost 50,000 (5.3% increase in 5 years) combined with wage increases which averaged 17.6% was putting the institution in financial peril.  Of course all this additional spending is done without the corresponding increase in customer satisfaction or efficiency.

Unfortunately there are more examples of government inefficiency and waste. The telecommunications subsidiary RACSA lost $10 million dollars in a year and half.  The agricultural council CNP required 2.3 billion Colones to avoid technical bankruptcy. Infrastructure projects such as highways end up costing 4 times more than budgeted due to negligence and incompetence.

For the 2015 budget the government of Costa Rica will spend 28.98% of the budget to pay salaries to government employees and another 22.10% just to amortize payments on the debt.  The government of President Solis increased government spending in the 2015 budget by 19%.

The ability of several government sectors to negotiate and pass their own salary and pension laws has created a wage and pension system that will not be sustainable in the future.   For example the Judicial Employee Pension fund approved a pension scheme called “Regala IV” which reduced the retirement age from 62 and allowed employees to retire at age 55.   Their pension is based on the average of the last 12 salaries paid which generally represent the highest salary earned during their service.   The word “Regala” means “gift” and for the  435 persons that received this benefit it certainly was.  Another 120,000 government workers are covered by at least 54 different collective bargaining agreements that guarantee them specific benefits and pension plans.

In a recent national poll conducted by Channel 7 (Teletica) they asked their viewers to rate from 1 to 10 their biggest concerns.  The top three concerns are unemployment, inefficient government and social inequality.   The results of the poll are as follows:

  1. Unemployment
  2. Inefficient government
  3. Social inequalityScreen Shot 2015-07-07 at 8.07.50 AM
  4. Ungovernable
  5. Inequality in education
  6. Fiscal deficit
  7. Low Productivity
  8. Deficiency of care in Social Security
  9. Chaotic territorial management
  10. Social unrest

      Based upon what I have indicated above it comes as no surprise that the perception of the general population towards the role of government is that it is inefficient and that they perceive the country to be ungovernable.   President Solis is realizing how little power the executive branch of the government has and how dependent he is on the National Congress (Asamblea Legislativa) to govern the country.   Asamblea Legislativa Costa RicaThe 57 deputies of the national congress are currently divided among 9 political parties making consensus to pass the laws that are required to move the country forward very difficult to implement.   

Costa Rica has tremendous potential.  The excellent weather,  the hospitable people, the beautiful landscape are a magnet that have attracted individuals and international companies to Costa Rica for many years.   Costa Rica has always been a leader in attracting foreign investment. For years it ranked as the largest recipient of direct foreign investment in Central America and the Caribbean.  This was all done with clear cut goals and policies that leverage an educated population, government stability and one of the best health care systems in Latin America.  To continue to attract individuals and business enterprises Costa Rica will need a visionary government and a united congress both willing to adopt a long term strategic plan and carve out a vision for the Costa Rica of the future.   The current model will simply not work anymore.

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