COSTA RICA

Republic of Costa Rica

República de Costa Rica

COUNTRY OVERVIEW

LOCATION AND SIZE.

Costa Rica is a central American nation, located between Nicaragua and Panama. Its borders span 309 kilometers (192 miles) with Nicaragua and 330 kilometers (205 miles) with Panama. Costa Rica also borders the Pacific Ocean and the Caribbean Sea, its coastline reaching across 1,290 kilometers (802 miles). The country has 51,100 square kilometers (19,730 square miles) of land, which is slightly less than the size of West Virginia, including the Isla del Coco (a small island in the Pacific Ocean).

San José, the capital, is located in a highland valley in central Costa Rica called the Meseta Central. Most of the country's population is located in this area formed by 2 basins separated by low, volcanic hills ranging from 900 to 1,500 meters above sea level. Other important cities are Cartago (the old colonial capital), Alajuela, and Heredia. The main port cities are Limón on the Caribbean Sea and Puntarenas on the Pacific.

POPULATION.

The country's population was estimated at 3.5 million in July of 2000. It is growing at a rate of 1.69 percent, which means that the population should reach approximately 4.1 million by 2010 and should double to over 7 million by the year 2035. Over 60 percent of the population is between the ages of 15 and 64, and only 5 percent of citizens are over 65 years old. The population is young, posing a challenge for the government to provide adequate schooling and training for youngsters. About 95 percent of the population can read and write. The larger, younger generation will also require greater health and retirement services as it begins to age.

Birth rates are at 20.69 per 1,000 people and death rates are at 4.31 per 1,000 people. There are approximately 2.52 children born per woman. Infant mortality rates are 11.49 deaths per 1,000 live births. There are approximately 1.02 males for every female in Costa Rica. The average life expectancy is 75.82 years: 73.3 years for males, and 78.5 years for females.

Adding to the high birth rate, the Costa Rican population also increases due to immigration —particularly from Nicaragua and other Central American countries. Immigrants come to Costa Rica in search of work opportunities, which they usually find in the agricultural sector. They are attracted by the relatively higher standards of living that are enjoyed in the country. The immigration rate for 2000 was estimated at 0.54 immigrants per 1,000 citizens.

The population of Costa Rica is mainly white (94 percent, including mixed European and Amerindian mestizos) and Roman Catholic (85 percent). There is a small proportion of black (3 percent), Amerindian (1 percent), and Chinese (1 percent) residents, and the second most important religious group is Evangelical Protestant (14 percent).

OVERVIEW OF ECONOMY

Costa Rica has a mixed economy in which both public and private companies play an important role. The government has supported socialist policies for decades. The emphasis in the economy has been placed on the governmental promotion of human development and welfare, while still allowing private companies to operate in some industries. These efforts were intensified in the 1950s, when political and social forces supported a method of economic development (planned growth) that was heavily dependent upon the state.

The biggest indication of the government's socialist ideology was its purchasing of goods and companies that were in trouble. When the state bought an interest in key industries such as banking, electricity, telecommunications, insurance, medicine, and education during the second half of the 1900s, the economy underwent nationalization . Under government control, Costa Rica achieved a relatively high standard of living.

However, this strategy relied on deficit spending, which meant that the Costa Rican government was spending money that it did not have. Even worse, the government also financially supported import substitution industrialization (ISI) policies during the 1960s and 1970s. Such policies were supposed to make the country more self-sufficient in industrial production, but ISI policies put Costa Rica deeper in debt.

The worldwide recession of the 1980s helped cause a Latin American debt crisis. Facing a devalued currency and an inflation rate of over 100 percent, Costa Rica experienced the most severe recession since the 1930s. The country was forced to make economic reforms and to liberalize the economy. This process began with a currency stabilization program (to stop inflation ), and led to a structural adjustment program (SAP) that tried to reduce government intervention in the economy.

The government sold many companies in which it had invested, but state control of the main industries persisted, with the exception of the banking industry. The people of Costa Rica preferred a state-run economy, and chose to finance their debt through the attraction of foreign direct investment . Public funds continued to be directed towards the manufacture and export of industrial goods. In spite of an increase in taxes, deficit spending continued, and the public debt grew. Interest payments on this debt absorbed a third of public accounts annually, making the economy unstable. Foreign direct investment helped the growth of local supply networks and supported export growth. The Intel Corporation opened a microprocessing plant in Costa Rica in 1998. The country has also been successful at promoting tourism, which has become an important source of foreign investment, has increased employment, and has generated substantial exchange revenue.

High levels of gross domestic product (GDP) growth achieved during 1998 and 1999—around 8 percent—proved unsustainable in 2000 when the demand for microprocessors plummeted. GDP growth during 2000 fell to a mere 1.5 percent. Economic policy focused on controlling inflation (at a historically low 10 percent), but the fiscal deficit remained above 4 percent, limiting economic growth.

POLITICS, GOVERNMENT, AND TAXATION

Costa Rica differed from other Spanish colonies in that it never developed a system of large land holdings. Agricultural production was limited to the size of families, and the distribution of land and other resources was relatively equal. Independence from Spain came without violence in 1821. After joining the Mexican Empire briefly in 1822, the Central American colonies— Guatemala, Honduras, El Salvador, Nicaragua, and Costa Rica—created a federated republic in 1823, which collapsed in 1829. Costa Rica is a democratic republic organized under the 1949 constitution. The president, 2 vice-presidents, and single-chamber congress (the Legislative Assembly) are directly elected for 4-year terms. The Supreme Court justices are elected by the Legislative Assembly for 8-year terms.

Liberal political reforms in the late 1800s facilitated the expansion of democratic institutions and processes. The middle class of Costa Rica flourished along with the development of commerce, services, and manufacturing. As economic conditions worsened through the Great Depression of the 1930s, the role of the state increased, and the citizens of Costa Rica demanded economic reform. Much of the country's character was defined in the 1950s through the abolition of the army, the nationalization of the main industries, and the construction of a social welfare system .

The main political forces in the country since the introduction of the social welfare system have been the Social Democrats (Liberación Nacional) and the Christian Democrats (Unidad Social Cristiana). Both Social and Christian Democrats have pursued an active involvement of the state in economic affairs. As a result, Costa Rica is a country in which the public sector plays a major role. The wave of privatization that has shaken most Latin American countries has not been significant in Costa Rica. The state continues to control key industries such as electricity, telecommunications, banking, insurance, health, oil refinery, and alcohol distillation. This situation has resulted more from public opposition to privatization than from government policy. As a result, the state has focused on administrative reforms that attempt to improve the efficiency of public companies.

Although there has been an increase in the level of participation of the private sector , the state is still in control. Banking is no longer a state monopoly , but the 3 largest banks are state owned. Medicine is also practiced privately, but the largest and most modern hospitals are owned and operated by the government's social security system. A law passed in 2000 allows the handling of oldage pensions by private companies, but the majority of pensions are still under state control.

The central government has a significant impact on the economy with its expenditures totaling over 30 percent of GDP in 1998. This is much higher than the level of expenditures in Canada (24.7 percent of GDP), the United States (21 percent) or the East Asian countries (10.4 percent), but is lower than the level in France (46.6 percent), Italy (44.6 percent), the U.K. (37.9 percent), Spain (36.1 percent), or Germany (32.9 percent). According to Central Bank figures (1999), the main sources of government revenue were import duties (42 percent), income taxes (22 percent), sales taxes (16 percent), and consumption taxes (5 percent).

Since tax revenues are lower than 23 percent of GDP, the government finances its expenditures through debt. This creates a deficit that in 1996 amounted to 4 percent of GDP and, although it was lowered to levels closer to 3 percent during 1998, has resurged during the past 2 years. Public debt has risen as a result, to a point where it represents more than the total of goods and services produced by the country, and thus represents a major source of economic instability. Interest payments on the debt absorb up to a third of the national budget, restricting the amount of funds that can be devoted to building schools, roads, and hospitals. The country's Central Bank has a limited ability to control the money supply and to fight inflation.

In spite of these negative trends, the government devotes over 5 percent of GDP to education and almost 7 percent of GDP to health. This compares well to the Latin American averages of expenditure in education and health, at 4.5 percent and 3.1 percent, respectively, and is comparable to international levels. The result of this policy has been an educated, skilled workforce.

INFRASTRUCTURE, POWER, AND COMMUNICATIONS

One of the greatest challenges facing the country is the maintenance of its infrastructure . Investments in this area have not kept pace with economic growth. There is more traffic than the old roads and ports can safely

handle, and the communication and power networks are not strong enough for the country's demands. A law was passed in 1998 to allow the development and administration of the infrastructure through private contracts, but by 2000 not one contract had been granted.

Costa Rica's communication infrastructure is less advanced than other Latin American countries. For example, in 1998 telephone lines per 1,000 inhabitants were at 172, better than the Latin American average of 118. But cellular phones per 1,000 inhabitants were at 28, caompared with 43 for all of Latin America, while Internet hosts were at 0.85 per 1,000 inhabitants compared to 4.85 for Latin America. Television sets were at a level of 387 per 1,000 inhabitants, compared to 255 per 1,000 for Latin America, but cable subscribers were at 13.8 per 1,000, compared to 28.3 per 1,000 for Latin America.

The country has over 35,705 kilometers (22,187 miles) of roads, of which 20 percent corresponds to national highways and 80 percent to local roads. About 56 percent of the national roads and 12 percent of the local roads are paved. Two major projects were underway by the end of 2000 to improve the carrying capacity of the main roads connecting the capital to the Pacific Coast.

Electric power generation and telecommunications are handled by a state monopoly, the Instituto Costarricense de Electricidad (ICE). Efforts to open these sectors to competition and privatization sparked riots and public protests in early 2000. The government claimed that it needed help from the private sector in order to service demand. Rioters were afraid that privatization would result in higher rates and the neglect of rural locations. The country's power source is mostly hydroelectric, although geothermal and wind sources are also used. The Costa Rican Congress was discussing a restructuring of the ICE in 2000-01 that would allow the establishment of joint ventures for the development of energy and telecommunication projects. It would, however, fall short of allowing competition by private participants in these sectors.

An index compiled by the Instituto Centroamericano de Administración de Empresas (INCAE), the Harvard Institute for International Development, and the Central American Bank for Economic Integration shows Costa Rican infrastructure lagging behind that of other Central American and East Asian countries. Values assessed ranged from 1 to 7 with higher values representing better infrastructure conditions. Costa Rica obtained a value of 2.29 compared to 3.46 for Guatemala, 3.56 for Nicaragua, 4.55 for South East Asia, and 4.64 for the United States, Japan, Ireland, Sweden, and China. This means that Costa Rican business faces greater challenges to compete against other nations.

ECONOMIC SECTORS

The Costa Rican economy is concentrated in the service sector, with 60.5 percent of its 1998 GDP represented in this category. The main service activity in the country is tourism, with over 1 million visitors in 1999. Industry is the second most important sector, representing 24 percent of GDP in 1998, followed by agriculture, which represents 15.2 percent of GDP.

The amount that industry contributes to GDP in Costa Rica is average for Latin America but is low when compared to that of East Asia (44 percent of GDP), the Arab nations (40 percent of GDP), and Eastern Europe (35 percent). However, it has become an area of aggressive growth through government stimulus. Efforts to build a high technology park through foreign direct investment have attracted firms like Intel Corporation, Baxter Medical, Microsoft, Abbot Laboratories, Conair, and Alcoa.

Government policies have attempted to reduce dependence on agriculture as a source of employment, production, and foreign exchange revenue. This has reduced the relevance of agriculture from close to 40 percent of GDP in the 1950s to its current 15.2 percent level. However, it still employs about 20 percent of the labor force .

AGRICULTURE

Costa Rica's temperate (warm) climate and fertile soils are suitable to agricultural production. There is an abundance of water—yearly rainfall averages 4 meters— and irrigation has been successfully applied to develop more arid (dry) regions. The government supports growers through research, training, and technical assistance.

The agricultural sector in Costa Rica has been declining in importance since the 1950s, but in 1998 still accounted for 15 percent of GDP and employed one-fifth of the labor force. Almost 10 percent of the country's land is used for agriculture. Agriculture is still an important contributor to foreign trade. Excluding free zone companies, agricultural exports represent approximately 60 percent of export flows. Traditional crops, like coffee and bananas, have been the staples of agricultural production since the 18th century. However, a wide range of nontraditional products has appeared since the 1980s that have begun a revival in agricultural exports.

Coffee is the country's oldest agricultural product and has been exported since the 1790s. In the 1820s the Costa Rican government stimulated its production by distributing free coffee plants and offering tax exemptions to interested families. This approach resulted in a group of small producers that, in spite of the existence of large-scale growers, has managed to remain in existence. Costa Rican coffee has been characterized by its high quality and efficient production, boasting some of the highest area yields in the world. In 1999 the country produced 147,000 metric tons of coffee. Although for many years coffee was the country's main source of foreign exchange, low international prices eroded its importance. Production for 1994-99 averaged 2.9 million bags (133,000 metric tons) with revenues of US$370 million annually. While such revenue represented about 11 percent of total export earnings in 1994, it only amounted to 4 percent of total export earnings in 2000.

Banana production surpassed coffee as the main agricultural product in 1992. Local farmers have cultivated it for over a century on the country's coasts, although primarily multinational corporations handle its export and sale. Production grew constantly during the 1990s, and prices remained steady. Exports for 1994-99 averaged 2,045,000 metric tons with revenues of US$624 million. This represented almost twice the revenue generated by coffee. Costa Rica devotes 50,000 hectares to growing bananas, almost 1 percent of its territory. It is the second largest producer in the world with an annual crop of approximately 115 million boxes sold in the United States and Europe. Growers estimate that their industry generates over 40,000 direct jobs and 100,000 indirect jobs. Workers in banana production enjoy the highest salaries and benefits in the Costa Rican agricultural sector.

Costa Rica is also an important producer of sugar. Yearly export volumes average 130,000 metric tons per year, with revenues of US$39 million. However, unlike coffee or bananas, sugar production is largely for local consumption, which exceeds 2.6 million metric tons. Over 48,000 hectares of land are dedicated to the production of sugar.

Nontraditional agricultural goods have been rising in importance over recent years. Most of them are export oriented and linked to various forms of agroindustry. Examples are African palm used for the extraction of vegetable cooking oil, and oranges processed for their juice and exported as fluid or concentrate. Although African palm has been cultivated since the 1970s, its period of strong growth began in the 1990s. By 1996 over 27,000 hectares were in production generating a volume of 422,000 metric tons. Orange production began in earnest as recently as 1990, spurred by the construction of 2 processing plants. Production areas doubled in 6 years, reaching 23,500 hectares and 165,000 metric tons. Other important nontraditional agricultural products are hearts of palm, ornamental plants, and macadamia nuts.

INDUSTRY

Costa Rican industry expanded in the 1960s and 1970s through government investment and protection. Sizable industrial investments were undertaken by the state through its development agency, CODESA. The investments aimed at reducing foreign dependence. However, the halt of foreign competition through trade protection resulted in inefficiency and products of poor quality. The strategy was abandoned in the mid-1980s as the government initiated a process of trade liberalization.

Industrialization policies since then have supported nontraditional exports. They have relied on direct subsidies such as the CAT (Certificado de Abono Tributario— a tax refund certificate) program; and indirect subsidies such as income tax exemptions, preferential import duties, and streamlined import-export facilities.

The result has been a sustained increase in the flow of industrial exports that has more than doubled their dollar value in less than 10 years, from US$518 million in 1991 to US$1.1 billion in 1999. Since 1996, industrial exports have contributed over 40 percent of all exports, excluding those from the free zone. About 15 percent of the workforce is employed in manufacturing activities.

Industry has also been promoted through the attraction of foreign investment. The country's industrial policy has been successful in attracting high technology companies, the most noteworthy being Intel Corporation, which invested over US$200 million in the construction of microprocessor production facilities in 1998. Total export volumes nearly doubled as a result of these investments, from US$3.5 billion in 1995 to US$6.6 billion in 1999. The export volume of the free zone sector was greater than the combined revenues of the normal export sector.

Because small industry is rarely eligible for free zone benefits but is subject to all forms of regulation and taxes—including payroll taxes that can reach up to 50 percent of workers' salaries—a growing number of establishments have been appearing in the informal sector . The Costa Rican Chamber of Industry estimates that 84 percent of all the industrial firms established in the 1990-98 period belonged to the informal sector.

MINING.

Gold is mined on the southern Pacific Coast and northwestern regions of the country. Some controversy exists as to the ecological impact of the methods employed in these extractions. Silver is also mined— though not extensively—in the western part of the country. Deposits of manganese, nickel, mercury, and sulfur exist but remain unexplored. Petroleum deposits have been identified in the southeastern region, but their exploitation has been deemed uneconomical. Salt is produced from seawater.

MANUFACTURING.

Until recently, most of the country's industry consisted of small-scale light manufacturing enterprises. Intel Corporation's arrival in 1998 marked the first large-scale manufacturing venture. Coffee-drying plants, sugar mills, cheese factories, sawmills, woodworking factories, breweries, and distilleries characterize the manufacturing sector. There is a single petroleum refinery that is state owned, and several hydroelectric plants with capacity to produce close to 6 billion kilowatt hours of electricity. Factories produce petroleum products, furniture, paper, textiles, chemicals, pharmaceuticals, plastics, footwear, cigars, cigarettes, jewelry, and clothing.

About half of the 4,856 industrial firms are located in the capital, San José. Next in importance are Alajuela (20 percent), Heredia (11 percent), and Cartago (10 percent). Of these firms, 2,411 (49.6 percent) are micro-enterprises employing between 1 and 4 workers. There are 1,547 (31.9 percent) small industries with 5 to 19 employees, 624 (12.9 percent) medium industries, with 20 to 29 employees, and 274 large industries (5.6 percent) with 100 or more employees.

According to the Ministry of Commerce and Industry, 24 percent of all industrial establishments process foods, drinks, and tobacco; 21 percent are metal and mechanic shops; 15 percent process wood, furniture, or other wooden products; 14 percent produce textile or leather products; 9 percent are in paper and printing; and 8 percent are in chemicals, rubber, and plastics.

SERVICES

Over 50 percent of the Costa Rican workforce is employed in the service sector, producing over 60 percent of the country's GDP.

TOURISM.

The most dynamic portion of the service sector is tourism. Costa Rica pioneered ecotourism (the practice of touring natural habitats in a manner that minimizes ecological impact). Because of its great biodiversity the country enjoys a natural advantage in this sort of activity. The number of tourists visiting Costa Rica has increased steadily during the 1990s, at an average rate of 15 percent per year. During 1999 over 1 million people visited the country, and the Costa Rican tourist board estimates that number increased by over 10 percent in 2000. Since 1986 a flow of investment exceeding US$800 million has been devoted to developing the sector. In 2001 there were over 13,400 rooms available for tourists. In 1998 US$883 million was generated by the tourist industry. This amount was over twice the revenue generated by coffee and 1.3 times that of banana exports. The government promotes the development of tourism through the Instituto Costarricense de Turismo (ICT), or tourist board, which prepares a yearly development plan. ICT runs specialized educational facilities to train workers in hotel management and other tourism-related activities.

RETAIL.

Retailers currently employ about 20 percent of the active workforce. Most retail firms are small to medium companies, although large discount retailers and hypermarkets have established themselves in the market during the past 2 years. There are 4 main supermarket chains—Automercados, MasxMenos, Super2000, and Perifericos—as well as a number of one-location markets of considerable size. Coverage of retail stores is limited to the Central Valley, although some have made inroads into the provinces during recent years. The oldest and largest department stores are La Gloria, with significant coverage in the Central Valley, and Llobet, located mainly in Alajuela.

FINANCIAL SERVICES.

About 5 percent of the workforce is employed in financial services. The sector generates about 3.6 percent of GDP. Banking was a state monopoly until 1987, when private institutions were allowed to coexist legally with the state banks, although they were limited to offering time deposits and were not allowed to offer checking or savings deposits. Reforms in the 1990s allowed private banks to offer the entire range of financial services, virtually eliminating the previous state monopoly. The only difference that persists between private and public banks is that the latter enjoy unlimited deposit guarantee from the state whereas private deposits are un-secured. There are 3 public banks—Banco Nacional, Banco de Costa Rica, and Banco Crédito Agrícola de Cartago—which represent 41 percent of total credit, and 20 private banks which represent 35 percent of total credit (2000). Other financial institutions include a workers' bank known as the Banco Popular y de Desarrollo Comunal which is capitalized through mandatory payroll contributions from workers and employers, a public funding agency for mortgage financing known as the Banco Hipotecario de la Vivienda, savings and loan cooperatives, mutual fund companies, and finance companies. The social security fund also engages in long-term mortgage financing. Insurance is presently a state monopoly; all insurance business is handled by the Instituto Nacional de Seguros.

There is a private stock exchange, the Bolsa Nacional de Valores (BNV), which is the oldest and largest in Central America. Its current annual volume is approximately US$28 billion, but over 80 percent of the volume traded is in public instruments. Only a small fraction of this volume (under 1 percent) is in equities . Some international transactions are also handled through the exchange. There are 27 brokerage companies currently participating at the exchange.

There are 3 regulatory entities in the financial sector: the Superintendencia de Entidades Financieras (Financial Superintendence), regulating banks, credit cooperatives, and other financial institutions; the Superintendencia de Pensiones (Pension Superintendence), regulating pension administrators; and the Superintendencia de Valores (Securities Superintendence), regulating securities and exchanges. All 3 entities are governed by a national board or commission, the Consejo Nacional de Supervisión Financiera.

COMPUTER SOFTWARE.

A burgeoning sector in Costa Rican services is the production of computer software. The National Chamber of Software Producers estimates the country currently boasts the highest number of per capita software producers in the world. About 85 percent of these firms, all nationally owned, export their products with yearly revenues of over US$50 million. The sector is estimated to have generated over 1,500 jobs in 1998. The high level of education and technical expertise available in the population favors the development of this industry, which is expected to continue growing.

INTERNATIONAL TRADE

Following a period of protectionism during the 1960s and 1970s, Costa Rica has slowly opened to greater foreign investment. The result has been an increase in import and export activity. Whereas imports and exports each barely amounted to US$200 million in 1969, in 1998 they had reached levels of US$6.2 and US$5.5 billion, respectively. The bulk of this growth occurred during the

1990s. In the case of imports it took the country from 1977 to 1990 to double its import volume from US$1 to US$2 billion, but only 8 years (1990-98) to triple that level to US$6.2 billion. The main sources of these imports in 1998 were the United States (41 percent), Japan (8.1 percent), Mexico (7.3 percent), and Venezuela (4 percent). In the case of exports it took from 1980 to 1992 (12 years) to double its export volume around the US$2 billion level, but only 6 years (1992-98) to more than double again and reach US$5.5 billion. The country's main export destinations in 1999 were the United States (49 percent), the European Union (22 percent), and other Central American nations (10 percent).

This growth has been accompanied by an important shift in the composition of trade. The importance of agricultural exports has diminished in favor of industrial exports. From 1991 to 1999, industrial goods went from 49 percent to 77 percent of total exports, whereas agricultural goods fell from 51 percent to 23 percent, respectively. This shift was largely the result of policies conducted to promote direct foreign investment and stimulate exports. These investments were carried out in free zone areas and their contribution to exports grew from 22 percent in 1991 to 60 percent in 1999. During the same period, local industry reduced its contribution to exports from 27 percent to 17 percent.

This growth of exports was driven by the arrival of foreign manufacturers—most importantly, the Intel Corporation. With its arrival in 1997, free zone exports shot up by a factor of 4, from US$891 million to US$3.6 billion. The relevance of Intel's exports can be gauged by their impact on the total volume of country exports, which rose from US$4.2 billion in 1997 to US$6.6 billion in 1999.

Since Costa Rica relies heavily on imports of raw materials and capital goods , industrial export growth has been accompanied by a substantial growth in imports. The country has carried a deficit in its balance of trade for every year since 1995, except 1999. However, the deficit has shrunk from over 33 percent of total exports in 1995 to just over 7 percent of total exports in 2000. This trade deficit has been financed by foreign capital flows, which have totaled US$2.4 billion in the past 5 years. Income from the service sector, particularly from tourism, has also helped finance the trade deficit.

The country's dependence on foreign capital flows to sustain imports is one of its recognized weaknesses. Although so far it has managed to attract sufficient levels of investment through its aggressive promotion policies, its stable social and political circumstances, and its highly educated workforce, the inability to generate sufficient foreign exchange through exports alone makes the country vulnerable to changes in international circumstances. Investment attraction policies have also been

criticized as expensive and fiscally unsustainable since they require substantial subsidies and tax exemptions.

MONEY

Costa Rica has suffered from chronic inflation during the last 25 years. Inflation rates exceeded 100 percent at the height of the debt crisis in the early 1980s, but monetary authorities have successfully managed to bring the inflation rate under control. Inflation rates at the end of the 1990s varied from 10 percent to 15 percent annually.

The country's high level of social spending generated fiscal deficits that were financed through the Central Bank. An administrative structure that provided for government control of the Central Bank allowed its easy manipulation. Although subsequent reforms granted the Central Bank more freedom from the government, it still carries the burden of high debt. Since interest payments on the public debt represent as much as 30 percent of the spending budget, total debt is increasing, requiring ever larger amounts of public funds and limiting the ability of the government to spend in other areas such as health and education. The government's inability to balance the fiscal budget has led to inflationary pressures.

The persistence of inflation has led to periodic currency devaluation in order to protect the competitiveness of Costa Rican exports. The government's policy aims at maintaining a neutral currency value by comparing domestic inflation to an index of international inflation rates. The goal is to maintain the local currency at its 1992 level, adjusting for inflation so that its purchasing power is neither greater nor lower than what it was at that date. Devaluation rates typically follow inflation rates, and are currently at a 10 percent to 12 percent annual level. The exchange rate for January 2001 was approximately 320 colones to the dollar.

Although the legal currency is the colón, dollar-denominated transactions are legal and widespread. This practice developed in the 1980s as people tried to protect themselves against inflation and devaluation. Legalization took place in the early 1990s. Convertibility of the colón to the dollar is unrestricted and can be done at every bank and financial institution. Loans and investments can be contracted in dollars, and rent contracts are typically denominated in dollars.

POVERTY AND WEALTH

Costa Rica has a large, professional middle class, and a relatively equal distribution of wealth. For the years between 1987 and 1998, the poorest 20 percent of the population held 4 percent of total income, whereas the richest 20 percent held 52 percent of total income. Approximately 9.6 percent of the population was reported under the World Bank poverty line (PPP US$1 a day) in 1998, compared to an average of 15.6 percent for Latin America and the Caribbean. The country had a per capita income (at purchasing power parity ) of US$7,100 in 1999.

The GINI coefficient is an index of inequality that measures the distance between a perfectly equitable distribution of income and the actual distribution across the population. A coefficient of 0 entails perfect equality, and a coefficient of 1 entails perfect inequality. Costa Rica's GINI coefficient for 1996, as reported by the World Bank, was 0.4607. This compared favorably with the distribution of income for its neighboring countries: El Salvador (0.052), Guatemala (0.0596), Honduras (0.537), Nicaragua (0.503), and Panama (0.485). The United States had a GINI coefficient of 0.408.

The Economic Commission for Latin America and the Caribbean classifies countries according to the incidence of inequality as measured by 5 risk factors: urban income inequality, urban poverty, urban unemployment, percentage of youngsters between 13 and 17 that are out of school, and the percentage of children that have not completed 6 years of schooling by age 15. Costa Rica is classified as having a low incidence of income inequality, measured as a ratio no greater than 8 between the richest 10 percent and the poorest 40 percent. It is also considered to have low incidence of poverty, measured

as a maximum of 20 percent of urban households classified as poor. In the other 3 categories Costa Rica is classified as having a median incidence of inequality: urban unemployment between 6 percent and 10 percent, between 8 percent and 15 percent of youngsters from 13 to 17 out of school, and between 10 percent and 20 percent of children under 15 that have not completed 6 years of schooling.

Costa Rica has also been classified by the United Nations Development Program as a country with medium human development in the 2000 report. The Human Development Index (HDI) is a composite index that measures different aspects of development, such as life expectancy at birth, education, and income. Costa Rica was ranked 47th in the world according to the HDI report 2000.

The Costa Rican government provides a comprehensive safety net through its social security system. Although coverage is far from universal and the system is plagued by high rates of evasion, payroll taxes insure a majority of the working population and their families. There is no unemployment insurance, but the law requires employers to pay up to 8 months of severance to dismissed employees. A legal reform passed in 2000 requires employers to pay monthly contributions into pension and severance funds that will be at the disposal of employees when required. Education is mandatory and free at the primary and secondary levels, and public universities provide high quality, low cost education at the undergraduate and graduate level. High quality medical attention is available and open to all citizens in the national hospitals.

Despite these achievements certain tendencies have started to erode the benefits of social services, creating a growing gap between the higher and lower sectors of the population. The quality of private education, for example, has surpassed that of public education. Service at public clinics and hospitals is poor, and there are long waits for medical appointments and procedures that tend to exclude those most in need. Public pensions are low and lag behind inflation. Reform efforts are underway that will attack these situations, but until they are passed, governmental authorities will continue to be challenged by these problems. Although government spending in these areas has not been reduced, critics believe that even higher amounts are required. The reforms partly hinge on this matter, but also aim at increasing the efficiency and effectiveness of administrators.

WORKING CONDITIONS

The labor force was estimated to be 1.377 million in 1998, with 5.6 percent unemployment and 7.5 percent underemployment (employment that does not require all the skills held by the employee). Working conditions are regulated in Costa Rica by a Labor Code (Código de Trabajo), and by administrative directives issued through the Ministry of Labor. Among the basic stipulations in effect are a minimum salary, a maximum workday with overtime stipulations, minimum safety and health requirements at the workplace, paid vacations and resting days, severance pay, a mandatory Christmas bonus, and maternity leave. Wage statistics published by the Inter-american Development Bank show that, although real minimum wages in Costa Rica fell by 1.4 percent between 1990 and 1992, they rose by 15 percent between 1992 and 1998.

Enforcement of the laws and regulation is conducted by Labor Ministry inspectors and through the labor courts. All employers are required to insure their workers against job-related injuries. Coverage is provided exclusively through the National Insurance Company (INS), and covers medical expenses, lost wages, and compensation in case of disability. Costa Rica has ratified, to date, 48 of the International Labor Organization (ILO) Conventions.

Labor unions have existed legally in Costa Rica for a long time and there are at least 4 national labor organizations or confederations: Confederación de Trabajadores Rerum Novarum (CTRN), Central del Movimiento de Trabajadores Costarricenses (CMTC), Confederación de Trabajadores de Costa Rica (CTCR), and Confederación Unitaria de Trabajadores (CUT). The influence of labor is greatest in the public sector.

During the 1990s, fiscal constraints led the government to curtail some of the privileges of public sector employees. These privileges were considered excessive and disproportionate to the benefits of workers in the private sector. Among the privileges that were discontinued were shortened workweeks, extended vacation periods, wage premiums linked to seniority and not productivity, and severance bonuses. This resulted in strikes held by public sector employees. Inability to solve the disputes led unions to process claims of labor rights violations at the International Labor Organization. During the 1990s, the ILO reports that strikes and lockouts averaged 18.5 per year, with the worst year being 1990. About 70 percent of these occurred in the public sector.

COUNTRY HISTORY AND ECONOMIC DEVELOPMENT

1502. Columbus lands on Costa Rica.

1522. Spanish colonizing expedition led by Gil Gonzalez Davila names the area Costa Rica, or "Rich Coast" because of the large amounts of gold given to them by the natives.

1562. Establishment of first permanent settlement, Cartago, by Juan Vázquez de Coronado "the true conqueror of Costa Rica," who acts as governor.

1821. Costa Rica gains independence from Spain, and votes to join the Mexican empire.

1823. Costa Rica joins the United Provinces of Central America, with Guatemala City as the capital.

1824. Juan Mora Fernández elected to be the first head of state. He presides over 9 years of stable progress.

1838. Costa Rica withdraws from Central American federation and declares complete independence.

1840s. Great wealth comes to several coffee growers, called "coffee barons."

1870-82. Investment in railroads and public works during the military rule of Tomás Guardia.

1871. Minor Copper Keith, the eventual founder of the United Fruit Company, comes to Costa Rica to manage production of the railway.

1873. Keith begins growing bananas to feed railway workers.

1889. Democracy established in Costa Rica.

1920-30s. Economic depression. Public calls for government reform culminate with communist -led strike against United Fruit Company.

1940-44. Rafael Angel Calderón Guardia continues the reformist movement as president by creating the social security system and introducing a labor code. He also founds the University of Costa Rica.

1948. A 40-day civil war kills 2,000 people; José Mariá Figueres Ferrer becomes head of the government, founds the Partido de Liberacion Nacional (PLN), and nationalizes the banks and insurance companies. (He dies a national hero in 1990.)

1950-60s. Period of expansion in government intervention in the economy and creation of a welfare state and public school system.

1980. Economic crisis due to inflation, currency devaluation, high oil prices, low prices for coffee, bananas, and sugar, high costs of the welfare state, and the disruption caused by the war in Nicaragua. Costa Rica has the world's highest per capita debt.

1981-84. The United States and IMF pour US$3 billion in aid into the Costa Rican economy.

1987. Costa Rican president Oscar Arias Sanchez wins Nobel Peace Prize for his efforts to establish peace in Central America.

1990. Rafael Angel Calderón Fournier, son of Calderón Guardia and opposition leader, is elected president. He promotes reform of the tax codes.

1994. José María Figueres Olsen, son of Figueres Ferrer and Liberación Nacional leader, is elected president. He initiates policies to attract direct foreign investment in high technology.

1998. Conservative economist and opposition leader Miguel A. Rodríquez is elected president. His narrow victory at the polls leads to an experiment with "Concertación" (an effort to consult civil society on national problems), especially on the issue of privatization.

FUTURE TRENDS

Economic policy in Costa Rica will hinge upon institutional reforms that will alter the balance between the state and the private sector. Although popular sentiment is antagonistic to privatization of public companies, there is a growing awareness of the need for these companies to achieve greater efficiency and effectiveness. At the same time, the budgetary constraints faced by the country in the year 2000 are restricting its ability to invest in infrastructure, health, and education. Since future competitiveness relies on these investments, a reassessment of public finances will be inevitable.

Recent revisions of the methodology employed by the Central Bank to calculate GDP revealed that national production figures reported in past years have been understated. This has led critics to point out that the tax burden—measured by tax revenues as a percentage of GDP—in the country is inordinately low. A reform of the tax code could ameliorate the fiscal constraints of the government. Reform is also required to adjust accounting for the effects of inflation, which reduces the effective tax rates. However, these effects will probably not materialize in the short term because of the political challenges they pose.

DEPENDENCIES

Costa Rica has no territories or colonies.

BIBLIOGRAPHY

"Balance preliminar de las economías de América Latina y elCaribe, 2000." Comisión Económica Para América Latina y el Caribe, 2000.

Banco Central de Costa Rica. "Indicadores Económicos." <http://websiec.bccr.fi.cr>. Accessed January 2001.

Bolsa Nacional de Valores de Costa Rica. "Estadísticas." <http://www.bnv.co.cr/estadist/>. Accessed January 2001.

Cámara de Industrias de Costa Rica. "Crecimiento de las empresas industriales formales e informales." <http://www.cicr.com/indicadores>. Accessed 15 January 2001.

Corporación Bananera Nacional. "Realidad bananera en CostaRica." <http://www.corbana.co.cr/realidad.htm>. Accessed January 2001.

Costa Rica Tourist Board. <http://www.tourism-costarica.com>. Accessed January 2001.

Diamond, Larry, Jonathan Hartlyn, Juan J. Linz, and SeymourMartin Lipset, editors. Democracy in Developing Countries, second edition. Boulder, Colorado: Lynne Rienner Publishers Inc., 1999.

"El 2000: un mal año." La Nación. 19 December 2000.

"Equidad, desarrollo y ciudadanía." Comisión Económica ParaAmérica Latina y el Caribe, 2000.

"Estabilidad resiste: Golpes del 2000." La Nación. 20 December 2000.

Instituto Costarricense de Turismo (ICT). "Area Estadísticas."

International Coffee Organization. "Coffee Export Statistics."<http://www.ico.org/>. Accessed 10 January 2001.

International Labor Organization. "International Labor Statistics."<http://database.iadb.org/>. Accessed 14 February 2001.

International Monetary Fund. International Financial Statistics Yearbook 2000. Washington, D.C.: International Monetary Fund, 2000.

Ministerio de Agricultura y Ganadería, Costa Rica. "Estadísticas Agropecuarias." <http://www.infoagro.go.cr/estadisticas>. Accessed 10 January 2001.

Ministerio de Planificación Nacional y Política Económica (MIDEPLAN). "Sistema de Indicadores sobre Desarrollo Sostenible (SIDES)." <http://www.mideplan.go.cr/sides>. Accessed January 2001.

La Nación Digital/Revista Viva. "Programas de software a la tica." <http://www.nacion.co.cr/viva/1997/julio/14/compu1.html>. Accessed 15 January 2001.

La Nación Digital/TecnoAvances #1. "Software con calidad de Exportación." <http://www.nacion.co.cr>. Accessed 15 January 2001.

Naranjo, Fernando. "Economía en picada." La Nación. 17December 2000.

Organización Internacional del Trabajo. "ILOLEX: Las NormasInternacionales del trabajo." <http://ilolex.ilo.ch:1567/public/50normes/ilolex>. Accessed 14 February 2001.

"Programa de las Naciones Unidas para el Desarrollo." InformeSobre Desarrollo Humano, 2000.

United Nations. Human Development Report 2000. New York and Oxford: Oxford University Press, 2000.

U.S. Central Intelligence Agency. World Factbook 2000. <http://www.odci.gov/cia/publications/factbook/index.html>. Accessed April 2001.

World Bank. 2000 World Development Indicators. Washington, D.C.: World Bank, 2000.

—Ludovico Feoli

CAPITAL:

San José.

MONETARY UNIT:

Colón (C). One colón is composed of 100 céntimos, but céntimos are no longer used. The smallest unit of money in circulation is the 5 colón coin, followed by the 10, 25, 50, and 100 colón coin. Bills circulate in denominations starting at 1,000 colones, and are available in 2,000, 5,000, and 10,000 colones.

CHIEF EXPORTS:

Coffee, bananas, sugar, textiles, electronic components, electricity.

CHIEF IMPORTS:

Raw materials, consumer goods, capital equipment, petroleum, electricity.

GROSS DOMESTIC PRODUCT:

US$26 billion (purchasing power parity, 1999 est.).

BALANCE OF TRADE:

Exports: US$6.6 billion (1999 est.). Imports: US$5.9 billion (1999 est.).