Country Forecast

Political Risk Services
Costa Rica Country Forecast

Reproduction without written permission of The PRS Group is strictly prohibited.
Nicaragua
q
Liberia Alajuelaq Moin q Puntarenas q San Jos q Caldera

q
Caribbean Sea
Puerto Limn q
Nicoya
q
Puerto Quepos
q San
Costa Rica
Isidro
Golfito
q
Panama
Pacific Ocean
REV2003
Page 2
Map

1-Oct-2010
Costa Rica
Country Forecast
Highlights
MOST LIKELY REGIMES AND THEIR PROBABILITIES 18-Month: Divided Government 60% Five-Year: Divided Government 65% FORECASTS OF RISK TO INTERNATIONAL BUSINESS Financial Direct Turmoil Transfer Investment 18-Month: Low B (B+) AFive-Year: Moderate (Low) B- (B) B- (B)
( ) Indicates change in rating.
Export Market AB-
* Indicates forecast of a new regime.
KEY ECONOMIC FORECASTS Real GDP Years Growth % 2005-2009(AVG) 4.9 2010(F) 3.8 2011-2015(F) 4.3
Inflation % 11.2 5.8 6.8
Current Account ($bn) -1.39 -0.92 -1.80
A Strong Start
Key Points To Watch
Like other Costa Rican presidents, Laura Chinchillas party does not have an outright majority in the 57-member Legislative Assembly, but her accomplishments thus far and her plans for the future seem to be well supported by the electorate Her PLN party holds only about 42% of the seats in the Assembly, and she is counting on the cooperation of the nine ML lawmakers for a majority, but the ML is likely to oppose Chinchillas proposed tax hikes (while also tolerating a larger near-term fiscal deficit)
Highlights
1-Oct-2010 Page 3

1-Oct-2010

Both Oscar Arias and his predecessor, Abel Pacheco, attempted to win approval of tax reforms during their tenures as president, but were stymied by their lack of a reliable legislative majority Chinchilla is counting on a heightened sense of urgency to produce a different result on her watch
Security and Trade Issues

The governments chances of success are directly related to the presidents popularity, and Chinchillas support is more likely to fall than to rise The main risk is that she might fail to address the publics concerns about the worsening security situation in Costa Rica, which has long enjoyed a reputation as a relatively safe haven within Central America While some progress on trade deals has been made, the outlook for Costa Rica to secure ratification of the FTA with China and a regional association agreement with EU are less than bright. Economic Forecasts for the Three Alternative Regimes
Divided Government
Growth (%) Inflation (%) CACC ($bn)
Centrist Coalition
Growth (%) Inflation (%) CACC ($bn) Growth (%)
PLN-PAC
Inflation (%) CACC ($bn)
2010 2011-2015
3.8 4.3
5.8 6.8
-0.92 -1.80
4.3 4.7
5.9 6.0
-1.35 -2.00
2.9 3.3
5.2 9.5
-0.75 -2.25
Page 4 1-Oct-2010
Highlights

1-Oct-2010

Political Fact Sheet
CAPITAL: San Jos CONSTITUTION: November 9, 1949 ADMINISTRATIVE SUBDIVISIONS: 7 provinces, 81 cantons POPULATION: 2009: 4.58 million AREA: 50,900 sq. km. OFFICIAL LANGUAGE: Spanish STATUS OF PRESS: free SECTORS OF GOVERNMENT PARTICIPATION: petroleum refining, insurance and banking, transportation, communications, public utilities, agriculture, commerce, development CURRENCY EXCHANGE SYSTEM: crawling band EXCHANGE RATE: 9/17/2010 $1=514.38 colnes ELECTIONS: Presidential and legislative elections are held every four years; last, February 7, 2010; next, scheduled February 2014.
HEAD OF STATE: President Laura Chinchilla Miranda (2010) HEAD OF GOVERNMENT: President Chinchilla (2010) OFFICIALS: Alfio Piva, First Vice President Luis Liberman, Second Vice President Gloria Abraham, Agriculture Mayi Antillon, Economy, Industry & Trade Leonardo Garnier, Education Teofilo de la Torre, Environment & Energy Fernando Herrero, Finance Rene Castro Salazar, Foreign Relations Anabel Gonzalez, Foreign Trade Maria Luisa Avila, Health Hernando Paris, Justice Sandra Piszk, Labor & Social Security Laura Alfaro, Planning & Economic Policy Jose Maria Tijereno, Public Security, Government & Police Carlos Ricardo Benavides, Tourism LEGISLATURE: Unicameral: 57-member Legislative Assembly. Distribution of seats: National Liberation Party (PLN), 24; Citizen Action Party (PAC), 11; Libertarian Movement (ML), 9; Social Christian Unity Party (PUSC), 6; Access without Exclusion Party (PAE), 4; other, 3.
Current Data
1-Oct-2010 Page 5

1-Oct-2010
Costa Rica Databank

2000-2004 Average 2005-2009 Average
25.54 5716 4.9 11.2 5.39 20.9 3.79 14.8 4.06 15.9 -0.27 -1.1 2.47 1.2 6.0 1.53 3.41 3.48 0.00 3.48 7.96 31.4 0.41 3.5 -1.39 -5.4 -10.6 8.58 11.56 -2.99 3.38 0.26 0.62 12.83 0.17 3.31 3.4 521.048 -5.6 4.46 1.5 10 29 62 2.1 96 19 22 59 15 0.18 0.04
2000
15.95 4059 1.8 11.0 2.84 17.8 1.94 12.2 2.40 15.0 -0.46 -2.9 1.47 1.2 5.2 0.41 1.29 1.32 0.00 1.32 4.59 28.8 0.64 7.8 -0.71 -4.5 -8.7 5.81 6.02 -0.21 1.94 0.24 0.20 8.19 0.95 0.37 0.7 308.190 -7.9 3.93 2.3 13 32 49 4.9 95 22 23 55 15 0.15 0.04
2001
16.40 4090 1.1 11.3 3.00 18.3 2.14 13.0 2.58 15.7 -0.44 -2.7 1.58 1.0 6.1 0.46 1.30 1.33 0.00 1.33 4.88 29.8 0.91 12.5 -0.60 -3.7 -8.2 4.92 5.74 -0.82 1.93 0.19 0.27 7.31 0.81 0.52 1.1 328.870 -6.7 4.01 2.0 13 32 51 6.2 95 20 25 55 15 0.16 0.04
2002
16.84 4107 2.9 9.2 3.18 18.9 2.17 12.9 2.84 16.9 -0.67 -4.0 1.64 1.6 6.4 0.66 1.47 1.50 0.00 1.50 5.26 31.2 0.81 10.7 -0.86 -5.1 -11.3 5.27 6.55 -1.28 1.87 0.16 0.30 7.60 0.72 0.78 1.4 359.820 -9.4 4.10 2.2 11 31 54 7.8 95 20 22 58 15 0.16 0.04
2003
17.52 4191 6.5 9.5 3.36 19.2 2.46 14.0 2.93 16.7 -0.47 -2.7 1.74 1.8 6.7 0.58 1.81 1.84 0.00 1.84 5.89 33.6 1.61 18.5 -0.88 -5.0 -10.1 6.16 7.25 -1.09 2.02 0.15 0.37 8.70 0.62 1.22 2.0 398.660 -10.8 4.18 2.0 11 31 57 7.7 95 20 22 58 15 0.17 0.04
2004
18.60 4366 4.2 12.3 3.46 18.6 2.54 13.7 3.04 16.3 -0.50 -2.7 1.59 -3.4 6.5 0.79 1.89 1.92 0.00 1.92 5.71 30.7 1.18 12.9 -0.80 -4.3 -8.8 6.37 7.79 -1.42 2.24 0.14 0.37 9.12 0.32 1.60 2.5 437.940 -9.9 4.26 1.9 11 31 60 7.6 96 20 22 58 15 0.17 0.04
Domestic Economic Indicators GDP (Nominal, $bn) Per Capita GDP ($) Real GDP Growth Rate (%) Inflation Rate (%) Capital Investment ($bn) Capital Investment/GDP (%) Budget Revenues ($bn) Budget Revenues/GDP (%) Budget Expenditures ($bn) Budget Expenditures/GDP (%) Budget Balance ($bn) Budget Balance/GDP (%) Money Supply (M1, $bn) Change in Real Wages (%) Unemployment Rate (%) International Economic Indicators Foreign Direct Investment ($bn) Forex Reserves ($bn) Gross Reserves (ex gold, $bn) Gold Reserves ($bn) Gross reserves (inc gold, $bn) Total Foreign Debt ($bn) Total Foreign Debt/GDP (%) Debt Service ($bn) Debt Service/XGS (%) Current Account ($bn) Current Account/GDP (%) Current Account/XGS (%) Exports ($bn) Imports ($bn) Trade Balance ($bn) Exports of Services ($bn ) Income, credit ($bn) Transfers, credit ($bn) Exports G&S ($bn) Liabilities ($bn) Net Reserves ($bn) Liquidity (months import cover) Currency Exchange Rate Currency Change (%) Social Indicators Population (million) Population Growth (%) Infant Deaths/1000 Persons under Age 15 (%) Urban Population (%) Urban Growth (%) Literacy % pop. Agricultural Work Force (%) Industry-Commerce Work Force (%) Services Work Force (%) Unionized Work Force (%) Energy - total consumption (1015 Btu) Energy - consumption/head (109 Btu)
17.06 4163 3.3 10.7 3.17 18.6 2.25 13.2 2.76 16.1 -0.51 -3.0 1.60 0.4 6.2 0.58 1.55 1.58 0.00 1.58 5.27 30.8 1.03 12.5 -0.77 -4.5 -9.4 5.71 6.67 -0.96 2.00 0.18 0.30 8.18 0.68 0.90 1.5 366.696 -8.9 4.10 2.1 12 31 54 6.8 95 20 23 57 15 0.16 0.04
Current Data
1-Oct-2010 ~ Page 6-7

1-Oct-2010
Costa Rica Databank

2000-2004 Average 2005-2009 Average
25.54 5716 4.9 11.2 5.39 20.9 3.79 14.8 4.06 15.9 -0.27 -1.1 2.47 1.2 6.0 1.53 3.41 3.48 0.00 3.48 7.96 31.4 0.41 3.5 -1.39 -5.4 -10.6 8.58 11.56 -2.99 3.38 0.26 0.62 12.83 0.17 3.31 3.4 521.048 -5.6 4.46 1.5 10 29 62 2.1 96 19 22 59 15 0.18 0.04
2005
19.96 4610 5.9 13.8 3.74 18.7 2.78 13.9 3.20 16.0 -0.42 -2.1 1.81 -4.0 6.6 0.86 2.28 2.31 0.00 2.31 6.76 33.9 0.95 9.2 -0.98 -4.9 -9.4 7.10 9.26 -2.16 2.62 0.19 0.47 10.38 0.21 2.10 2.7 477.790 -9.1 4.33 1.6 10 31 61 3.1 96 20 22 58 15 0.17 0.04
2006
22.53 5120 8.8 11.5 4.48 19.9 3.20 14.2 3.40 15.1 -0.20 -0.9 2.33 0.5 6.0 1.47 3.08 3.11 0.00 3.11 7.19 31.9 0.24 2.0 -1.02 -4.5 -8.6 8.10 10.83 -2.73 2.97 0.25 0.59 11.91 0.13 2.98 3.3 511.300 -7.0 4.40 1.6 10 29 61 1.6 96 20 22 58 15 0.18 0.04
2007
26.27 5890 7.8 9.3 5.72 21.8 4.07 15.5 3.92 14.9 0.15 0.6 2.82 7.6 4.6 1.90 4.08 4.11 0.00 4.11 8.44 32.1 0.22 1.6 -1.65 -6.3 -11.9 9.30 12.28 -2.98 3.55 0.34 0.73 13.92 0.11 4.00 3.9 516.620 -1.0 4.46 1.4 10 28 62 3.4 95 20 22 58 15 0.18 0.04
2008
29.66 6562 2.6 13.4 6.94 23.4 4.73 16.0 4.67 15.8 0.06 0.2 2.82 2.9 4.9 2.08 3.77 3.80 0.00 3.80 9.06 30.6 0.44 3.0 -2.75 -9.3 -18.7 9.55 14.57 -5.02 4.15 0.28 0.71 14.69 0.12 3.68 3.0 526.240 -1.9 4.52 1.3 10 28 62 1.3 95 20 22 58 15 0.19 0.04
2009
29.30 6397 -0.7 8.0 6.09 20.8 4.16 14.2 5.12 17.5 -0.96 -3.3 2.58 -0.8 7.8 1.35 3.83 4.07 0.00 4.07 8.33 28.4 0.21 1.6 -0.57 -1.9 -4.3 8.84 10.88 -2.04 3.59 0.24 0.59 13.26 0.30 3.77 4.2 573.290 -8.9 4.58 1.3 9 27 62 1.3 96 14 22 64 15 0.19 0.04
Domestic Economic Indicators GDP (Nominal, $bn) Per Capita GDP ($) Real GDP Growth Rate (%) Inflation Rate (%) Capital Investment ($bn) Capital Investment/GDP (%) Budget Revenues ($bn) Budget Revenues/GDP (%) Budget Expenditures ($bn) Budget Expenditures/GDP (%) Budget Balance ($bn) Budget Balance/GDP (%) Money Supply (M1, $bn) Change in Real Wages (%) Unemployment Rate (%) International Economic Indicators Foreign Direct Investment ($bn) Forex Reserves ($bn) Gross Reserves (ex gold, $bn) Gold Reserves ($bn) Gross reserves (inc gold, $bn) Total Foreign Debt ($bn) Total Foreign Debt/GDP (%) Debt Service ($bn) Debt Service/XGS (%) Current Account ($bn) Current Account/GDP (%) Current Account/XGS (%) Exports ($bn) Imports ($bn) Trade Balance ($bn) Exports of Services ($bn ) Income, credit ($bn) Transfers, credit ($bn) Exports G&S ($bn) Liabilities ($bn) Net Reserves ($bn) Liquidity (months import cover) Currency Exchange Rate Currency Change (%) Social Indicators Population (million) Population Growth (%) Infant Deaths/1000 Persons under Age 15 (%) Urban Population (%) Urban Growth (%) Literacy % pop. Agricultural Work Force (%) Industry-Commerce Work Force (%) Services Work Force (%) Unionized Work Force (%) Energy - total consumption (1015 Btu) Energy - consumption/head (109 Btu)
17.06 4163 3.3 10.7 3.17 18.6 2.25 13.2 2.76 16.1 -0.51 -3.0 1.60 0.4 6.2 0.58 1.55 1.58 0.00 1.58 5.27 30.8 1.03 12.5 -0.77 -4.5 -9.4 5.71 6.67 -0.96 2.00 0.18 0.30 8.18 0.68 0.90 1.5 366.696 -8.9 4.10 2.1 12 31 54 6.8 95 20 23 57 15 0.16 0.04
Current Data
1-Oct-2010 ~ Page 6-7

1-Oct-2010 Comparison: Costa Rica
Regional Real GDP Growth (2009): N&C America
Dominican Republic Haiti Panama Cuba Guatemala Costa Rica Nicaragua Honduras United States Canada Jamaica Trinidad & Tobago El Salvador Mexico -8 -6 -4 -2 (percent) 0 2 4
Regional Inflation Rates (2009): N&C America

Jamaica Costa Rica Trinidad & Tobago Honduras Mexico Nicaragua Panama Guatemala Dominican Republic El Salvador Canada Haiti United States Cuba -4.0 -2.0 0.0 2.0 (percent) 4.0 6.0 8.0 10.0
Page 8 1-Oct-2010
Reproduction without written permission of The PRS Group is strictly prohibited
Current Data

1-Oct-2010 Comparison: Costa Rica
Regional Current Account/GDP (2009): N&C America
Trinidad & Tobago Cuba Panama Mexico Guatemala El Salvador Costa Rica Honduras Canada United States Haiti Dominican Republic Jamaica Nicaragua -15.0 -10.0 -5.0 (percent) 0.0 5.0 10.0
Economic Performance Profile Country's Ranking Relative to All Countries Covered by Political Risk Services 2005-2009
GDP Per Capita ($) Real GDP Growth (%) Inflation (%) Unemployment (%) Capital Investment (% of GDP) Budget Balance (% of GDP) Current Account (% of GDP) Debt Service Ratio Currency Change (%)
5716 4.9 11.2 6.0 20.9 -1.1 -5.4
3.5 -5.6
NEXT 25%
BEST 25%
NEXT 25%
WORST 25%
Current Data
Reproduction without written permission of The PRS Group is strictly prohibited
1-Oct-2010 Page 9

1-Oct-2010

Social Indicators
Primary Energy Energy Consumption (1015 Btu): 9 Per Capita Consumption (10 Btu): 0.19 0.04
as of 2009
Population Annual Growth Infant Deaths per 1,000 Persons Under Age 15 Urban Population Urban Growth Literacy 1.3% 9 27% 62% 1.3% 96%
Work Force Distribution Agriculture Industry-Commerce Services Unions 14% 22% 64% 15%
Ethnic Groups white and mestizo (94%), black (3%), other (3%) Languages Spanish Religions Roman Catholic (76%), Protestant (14%), other (10%)
Page 10 1-Oct-2010
Current Data

1-Oct-2010
Costa Rica
Country Forecast
Comment & Analysis
Chinchilla Making a Strong Start President Laura Chinchilla marked the end of her first 100 days in office in early August with a speech highlighting the accomplishments of her first few months in office, and laying out her priorities for the rest of the term. The achievements focused mainly on the earmarking of additional funds for social programs and security. As for her future plans, Chinchilla affirmed her commitment to maintaining the policy course set by her predecessor, Oscar Arias, which combined support for economic liberalization with a pledge to ensure social justice for all Costa Ricans. Chinchilla declared that her government will focus on four areas: social welfare, economic competitiveness, environmental protection, and domestic security. Each of these policy areas claims a strong political constituency, and her specific proposals constructing 20,000 new housing units for low-income families and expanding child-care and elder services, reducing the unemployment rate to 5% (from 7.8% in 2009) by the end of her term, generating electricity sufficient to meet national demand using 95% renewable resources, investing in upgrades to transportation, sewage, and other infrastructure, and enhancing the effectiveness of law enforcement through increases in manpower, administrative reforms, and improved technical supportensured that most of the electorate found something they could like in her program. The strategy appears to have been effective. An August poll by Unimer showed just 38% of respondents rating Chinchillas performance as good or very good, but another 43% judged it to be acceptable, while only 12% assigned her a failing grade. On the separate question of confidence in Chinchillas leadership, she scored a 2.81 on a scale of 15 (the highest number for a president in seven years), while 58% of respondents believed that the president is capable of solving problems given enough time, and 46% felt that her administration can be trusted to effectively manage public expenditures (also a seven-year high). But Tax Reform Faces Hurdles Whether Chinchilla will be able to muster the legislative support needed to put her plan into action is not entirely certain. Her National Liberation Party (PLN) holds just 24 seats in the 57-member Legislative Assembly, and she is counting on the cooperation of the Comment & Analysis 1-Oct-2010 Page 11

1-Oct-2010

nine lawmakers from the Libertarian Movement (ML) for a majority. However, Chinchillas proposal to hike taxes while also tolerating a larger fiscal deficit in the near term will likely run into opposition from the ML, which espouses the principles of limited government and fiscal restraint. Costa Rica recorded small fiscal surpluses in 2007 and 2008, but last years economic contraction resulted in a steep decline in revenues that in combination with increased government spending on stimulus measures produced a fiscal deficit equivalent to 3.3% in 2009. The 2011 budget calls for increases in spending on social programs and security that are projected to widen the deficit to 5.3% of GDP next year, but budget performance through the first seven months of 2010 suggests that the fiscal gap might be at least that big this year. Finance Minister Fernando Herrero defended the planned larger deficits as necessary to support the economy until revenues return to pre-recession levels, but conceded that such a sizeable shortfall cannot be sustained for an extended period of time. Indeed, the borrowing required to finance the projected deficits will likely increase total public debt to more than 50% of GDP by 2011 (from less than 40% of GDP at the end of 2008), resulting in a heavier debt-service burden that could produce serious economic strains if government revenues do not make a strong and fairly rapid recovery. As a first step, the administration has begun cracking down on tax evasion, which by some estimates reduces government income by as much as 4% of GDP each year. But even if that effort is successful, the government will not be able to fully finance its spending pledges without broader tax reforms. The Finance Ministry has warned that the budget shortfall could increase to more than 6% of GDP in 2012 if proposed tax reforms are not approved. Many of the tax measures currently under consideration were first floated by the Arias administration. Among the most controversial are a tax on gambling enterprises and a special $300 levy on all registered businesses (regardless of size), the proceeds of which will be used exclusively for security-related spending. Other proposals include the replacement of the current 13% sales tax with a value-added tax (VAT), a financial services tax of 0.5%, and changes to the income-tax structure that would significantly increase the tax burden of those at the top of the income ladder. The government estimates that if enacted in its entirety, the tax-reform package will boost state income by 2.5% of GDP annually. Both President Arias and his predecessor, Abel Pacheco, attempted to win approval of tax reforms, but were stymied by their lack of a reliable legislative majority. Chinchilla is counting on a heightened sense of urgency to produce a different result on her watch. In Page 12 1-Oct-2010 Comment & Analysis

1-Oct-2010

that regard, she has gained potentially helpful assistance from Rodrigo Bolaos Zamora, the head of the central bank, who has warned that Costa Rica will be in very deep financial trouble if tax reforms are not implemented by the end of 2011. Despite such forecasts of doom, the tax proposals have encountered resistance from both the left and the right. Predictably, the ML has voiced objections to any tax increases, arguing that the government should instead focus heavily on ensuring compliance with existing tax rules. On the left, opponents of the tax proposals have noted the regressive character of the VAT, and have called for the replacement of the flat $300 fee on corporations with a progressive levy that would require large companies (such as Intel) to pay a much larger sum than small family-run businesses. Even if the Legislative Assembly approves the tax measures, rapid implementation is not assured. Under Costa Rican law, any single lawmaker (or any private citizen, for that matter) can challenge the constitutionality of measures passed by the Legislative Assembly on either substantive or procedural grounds, thereby forcing a review by the courts that can take several months to complete, even in cases where the soundness of the law is confirmed. Security Threat a Concern The governments chances of success are directly related to the presidents popularity, and it is probably safe to assume that Chinchillas support is more likely to fall than to rise. The main risk in that regard is that she might fail to address the publics concerns about the worsening security situation in Costa Rica, which has long enjoyed a reputation as a relatively safe haven within Central America. In addition to rising property crime, Costa Rica has also become a battleground in a spreading war among gangs fighting for control of the illegal drug trade between South and North America. The threat of crime is emerging as a top issue among all sectors of Costa Rican society, but especially among wealthier citizens, the most likely targets of criminals, and the business community, which recognizes the potential for heightened insecurity to deter investment and discourage tourism, one of the countrys most important industries. Chinchilla has adopted a two-track approach to addressing crime. On the one hand, the government is pushing for tighter law enforcement. During her first 100 days, she authorized the hiring of hundreds of new police officers and established the funding to increase prison capacity. On the other hand, the president has stressed the need to attend to the social causes of crime. Chinchilla contends that security issues cannot be divorced from the conditions of poverty and inequality that breed crime, and has argued that a
Comment & Analysis
1-Oct-2010 Page 13

1-Oct-2010

strong social safety net and an economic program that promotes healthy economic development are essential elements of an effective anti-crime strategy. As for the threat posed by drug gangs, Chinchilla declared in an Independence Day speech that Costa Rica was no longer immune from the epidemic of deadly violence that has driven up the murder rates in Guatemala and El Salvador. Warning that Costa Ricans must not kid ourselves, she stated that the government is at the point of losing measures of control over sovereignty, territorial spaces, and the integrity of its institutions. Critics lambasted the speech as overblown fear-mongering that would unjustifiably stigmatize Costa Rica, and castigated Chinchilla for failing to propose any solutions beyond increased spending on social programs. However, just days after the presidents speech, Costa Rica was for the first time ever identified by the US as a major world transit point for drug-trafficking. Officials in Washington were quick to point out that the designation was not a criticism, but rather a function of geography, and praised Chinchillas government for granting such high priority to security. Officials in San Jose are hoping that US recognition of Costa Ricas vulnerability will translate into US support (financial and otherwise) that bolsters the governments efforts to improve security. Chinchilla has seized the opportunity, immediately dispatching Security Minister Jose Maria Tijerino to Washington in search of help from the US. Chinchilla Aims High Even as her government pursues policies that are consistent with the PLNs social democratic roots, Chinchilla is also planning a major push to boost investment, promote innovation, and expand trade ties, with the aim of positioning Costa Rica to become the first developed nation in Central America. Toward that end, Chinchillas government is looking to increase exports to $17 billion per year (nearly double the total for 2009) and has established a goal of attracting $9 billion in new foreign direct investment (FDI) by the end of her term in 2014. Key elements of the governments development plan include the ratification of free-trade agreements (FTAs) concluded with the EU, China, and Singapore, the negotiation of additional trade treaties with a particular focus on Asia, upgrading the countrys highways and port facilities, and expanding competition in the electric-power market, which is currently controlled by the state-owned Costa Rican Institute of Electricity (ICE). The agenda is extremely ambitious, considering the limited progress made by Chinchillas predecessors on all of these fronts, and given the similar legislative roadblocks confronting the current administration, successful implementation is hardly a safe bet. Page 14 1-Oct-2010 Comment & Analysis

1-Oct-2010

Trade Deals Encounter Skepticism Some progress has already been made on the trade front. Foreign Minister Ren Castro has already traveled to Seoul, and reached an agreement to begin negotiations on an FTA with South Korea, and Costa Rica and Canada are preparing to discuss an expansion of their bilateral agreement to include investment and trade in services. However, the outlook for securing ratification of the FTA with China and a regional association agreement with EU are less than bright. The FTA with China, in particular, has met with strong resistance from elements within Costa Ricas Chamber of Industries, most notably food producers, who have complained that the labor standards imposed by the US under the Dominican Republic-Central American Free Trade Agreement (DRCAFTA) will make it impossible to compete with Chinese goods produced with much cheaper labor. In late August 2010, the Chamber presented its argument to the Legislative Assembly, contending that more limited commercial agreements with China would be far more beneficial for Costa Rica than a comprehensive FTA. The deal with the EU faces fewer obstacles, and is widely viewed by the business sector as an opportunity to boost investment and jobs without significantly undermining the competitiveness of key domestic industries. Nevertheless, as was made evident during the prolonged political battle over DR-CAFTA, the main opposition Citizen Action Party (PAC) is unlikely to back either of the deals. The ML, which favors expanded trade ties, proved during the struggle to secure ratification of DR-CAFTA that its support will require concessions in other policy areas, most likely with regard to the governments proposed fiscal reforms. If the ML demands more than Chinchilla is willing to concede, ratification of the trade deals will require the support of at least two of the smaller parties, a development that would bestow upon them unexpected leverage that they will undoubtedly exploit to the hilt. Thus, while Chinchilla is keen to implement the deals, she cannot count on majority backing for ratification. The FTA with China is clearly the most controversial, and the combined opposition of the PAC, environmentalists, and domestic business groups may be more than the new administration can overcome. Brighter Prospects for Reform of Power Sector The proposed liberalization of the electricity market is also a sticky political issue. Previous attempts to break ICEs monopoly have been thwarted by opposition from the companys employees and leftist elements in the Legislative Assembly, who have
Comment & Analysis
1-Oct-2010 Page 15

1-Oct-2010

characterized such efforts as back-door privatization that would result in job losses, higher costs, and inadequate services for rural communities. The government argues that private companies would complement the role played by ICE with the aim of ensuring that supply keeps pace with demand, and that contracts will be awarded on the basis of prices and quantities of electricity, with preference also granted to bidders making use of renewable resources. The draft legislation also includes requirements intended to ensure that services are available to all areas, regardless of population density or income levels. The safeguards included in the draft legislation might be sufficient to sway reluctant lawmakers. However, there is still some question whether a supermajority is required to secure approval of the reform, which, if nothing else, means the measure is certain to be subjected to a court challenge if the government attempts to implement it on the authority of a simple majority. Mining Halted One sector that does not figure to play a prominent role in the administrations economic development plans is mining. Just hours after taking office on May 8, Chinchilla issued a decree restoring a ban on all new open-pit gold mining in the country that had been lifted by Arias in 2008. The lone active gold mining operation, which is owned by Canadas Infinito Gold, has been embroiled in a two-year court battle. Chinchillas decree came in response to pressure from local community groups and from environmental activists who contend that mining operations will destroy the habitat of endangered species, thereby limiting Costa Ricas potential to become a world leader in the development of green tourism. The president declared the decree to be consistent with the publics rejection of extractive industries, which would seem to pretty much rule out any potential for flexibility. Weak Demand Will Hinder Recovery Real GDP growth slowed to 3.7% (year-on-year) in the second quarter of 2010, after rebounding to 6% in the first quarter of the year. The most recent data for the monthly index of economic activity (IMAE) confirmed that the declining trend continued into July, with the figures for agriculture, manufacturing, hotels, and financial services all slightly lower than in June, while the pace of contraction in the weakest sectors, most notably construction, barely slowed. The government has raised its forecast for annual real GDP growth in 2010 to 4.5%, and sees the growth rate reaching 5% in 2011. However, these optimistic projections assume a continued improvement in external conditions, in general, and a solid recovery in the US, in particular. Given the debt troubles in the EU, which point to a stalling of the economic Page 16 1-Oct-2010 Comment & Analysis

1-Oct-2010

recovery in Europe, the uncertain fate of the FTA with China, and the questionable sustainability of the US recovery, the official forecast is probably too optimistic. Although government spending will boost the domestic contribution to growth, the pace of expansion will be held to less than 4% in 2010. Chinchillas ability to rely on fiscal tools to spur significantly faster growth in 2011 will depend on the fate of the administrations tax measures, which remains quite uncertain. Even in a best-case scenario, securing approval of the tax reforms will likely necessitate changes that reduce the revenue-generating potential of the measures, making it difficult to narrow the large deficit without cuts to spending. On that basis, and assuming the continued sluggishness of US and European demand, real GDP growth will be held to 3.5%4% once again next year. Inflation eased to slightly more than 4% (year-on-year) in December 2009, holding the annual average rate to 8%, the lowest figure in decades, but still the highest rate in Central America last year. Weak domestic demand and the significant appreciation of the local currency since July have contributed to lower inflation in recent months. The consumer price index rose by just 5% (year-on-year) in September, bringing the average for the first nine months of the year to 5.6%, below the upper end of the central banks target range of 4%6%. The inflation rate is expected to trend upward over the remainder of the year, mainly owing to the base effect, but the annual average increase in consumer prices is forecast to remain close to the 6% target. The growth outlook for 2011 suggests that demand pressures will remain under control next year, although fairly robust state spending and a weakening of the colon is expected to push the inflation rate above 6%. The trade deficit narrowed significantly in 2009, as imports fell much more sharply than exports, reflecting the impact of weaker domestic demand and lower prices for staple imports. Weaker flows of remittances and income from tourism resulted in somewhat smaller surpluses in the services and transfers balances that in combination with an expansion of the income deficit contributed to a less pronounced (but nevertheless substantial) narrowing of the current account deficit in 2009. Exports to China, Costa Ricas second most important trade partner after the US, increased by 13% in 2009, and will continue to grow this year, regardless of the extent of progress on ratification of the FTA. However, the continued weakness of US and European demand will dampen overall growth of exports, while higher global prices for commodities will contribute to a more rapid recovery of imports, resulting in a larger trade deficit that will widen the current account shortfall to $920 million, equivalent to about 3% of GDP, in 2010. The slow but steady recovery of the economy will be accompanied by a gradual strengthening of domestic demand that will fuel growth of imports, resulting in a further increase in the external deficits in 2011.
Comment & Analysis
1-Oct-2010 Page 17

1-Oct-2010
Costa Rica
Country Forecast
Forecast Scenarios
SUMMARY OF 18-MONTH FORECAST REGIMES & PROBABILITIES Divided Government 60% Centrist Coalition 30% PLN-PAC 10%
SUMMARY OF FIVE-YEAR FORECAST Divided Government 65% Centrist Coalition 25% PLN-PAC 10%
REGIMES & PROBABILITIES
Most Likely Regime Scenario 18-Month Forecast Period: Divided Government (60% Probability) Five-Year Forecast Period: Divided Government (65% Probability)
Divided Government 2010 2011-2015 Growth (%) 3.8 4.3 Inflation (%) 5.8 6.8 CACC ($bn) -0.92 -1.80
It has been a fairly consistent feature of Costa Ricas politics that the party of the victor in the presidential election falls short of an outright majority in the 57-member Legislative Assembly, making it incumbent upon each new government to forge alliances with smaller parties in order to secure the passage of legislation. The power of the presidential office is inherently weak, owing to a constitutional prohibition against immediate reelection, and the characteristic diffusion of legislative power among several parties makes the task of governing that much more difficult. The outcome of the 2010 elections was perfectly consistent with that picture. Laura Chinchilla, the candidate of the incumbent National Liberation Party (PLN), won a decisive victory at the presidential election held on February 7, 2010, campaigning on a pledge to continue the policy course set by her predecessor, Oscar Arias, which combined support for economic liberalization with a pledge to ensure social justice for all Costa Ricans. She garnered 46.8% of the vote, compared to just 25.2% for her main rival, Ottn Sols, the leader of the left-leaning Citizen Action Party (PAC).
Forecast Scenarios
1-Oct-2010 Page 19

1-Oct-2010

However, the PLN once again fell short of 29 seats, actually suffering a net loss of one seat that reduced its total to 24, while the PACs seat total dropped by six to 11. The Libertarian Movement (ML), whose leader, Otto Guevara, finished third in the presidential balloting, gained three seats for a total of nine, while the Social Christian Unity Party (PUSC), at one time a major political player, picked up one additional seat to increase its total to six. The only other party with more than a single seat is the Access without Exclusion Party (PAE), which increased its total by three seats to four. In a speech marking the end of her first 100 days in office, Chinchilla affirmed her commitment to honoring her campaign promises, declaring that her government will focus on four policy areas: social welfare, economic competitiveness, environmental protection, and domestic security. Each of these issues claims a strong political constituency, and her specific proposalsconstructing 20,000 new housing units for lowincome families and expanding child-care and elder services, reducing the unemployment rate to 5% (from 7.8% in 2009) by the end of her term, generating electricity sufficient to meet national demand using 95% renewable resources, investing in upgrades to transportation, sewage, and other infrastructure, and enhancing the effectiveness of law enforcement through increases in manpower, administrative reforms, and improved technical supportensured that most of the electorate heard at least something they liked. Whether Chinchilla will be able to muster the legislative support needed to put her plan into action is debatable. She is counting on the cooperation of the nine lawmakers from the Libertarian Movement (ML) for a majority in the Legislative Assembly. However, the governments plan to rely on continued deficit spending in the near term and proposed tax increases that will be essential if the PLN is to have any hope of fulfilling its promises without a dangerous run-up of the public debt over the medium term will almost certainly encounter opposition from the ML, which espouses the principles of limited government and fiscal restraint. Other elements of Chinchillas program, including plans to move aggressively to conclude new free-trade agreements (FTAs), are expected to encounter strong opposition from the PAC and other left-leaning parties, as well as environmental groups and business groups representing the industries most vulnerable to increased foreign competition, and the PLN will need to strike bargains with smaller parties on an ad-hoc basis to win backing for ratification. Efforts to introduce greater competition in key marketsincluding electricity generation and telecommunicationswill similarly require drawn out negotiations, and concessions made to obtain the necessary legislative votes will limit the extent of such liberalization as does take place.
Page 20 1-Oct-2010
Forecast Scenarios

1-Oct-2010

In most respects, the trajectory of Chinchillas tenure is expected to follow the pattern of her two most recent predecessors, with the stalling or dilution of key parts of the governments agenda producing disappointment among the electorate, and the resulting decline in the presidents popular support reducing her leverage in negotiations with essential allies in the Legislative Assembly. In short, the most likely scenario for the fiveyear forecast period is the continuation of the political gridlock that has prevailed through most of the last decade. Legislative Obstacles Will Impede Liberalization Even as her government pursues policies that are consistent with the PLNs social democratic roots, Chinchilla is also planning a major push to boost investment, promote innovation, and expand trade ties, with the aim of positioning Costa Rica to become the first developed nation in Central America. Toward the end, Chinchillas government is looking to increase exports to $17 billion per year (nearly double the total for 2009) and has established a goal of attracting $9 billion in new foreign direct investment (FDI) by the end of her term in 2014. Key elements of the governments development plan include the ratification of free-trade agreements (FTAs) concluded with the EU, China, and Singapore, the negotiation of additional trade treaties with a particular focus on Asia, upgrading the countrys highways and port facilities, and expanding competition in the electric-power market, which is currently controlled by the state-owned Costa Rican Institute of Electricity (ICE). The agenda is extremely ambitious, considering the limited progress made by Chinchillas predecessors on all of these fronts, and given the similar legislative roadblocks confronting the current administration, successful implementation is hardly a safe bet. Beyond the obvious impediments posed by divisions within the legislature, the prospects for fully realizing the potential of trade and investment opportunities are further dampened by the organized resistance of environmental groups to increased investment in extractive sectors. The license issued to Canadas Infinito Gold to clear some 262 hectares of forest, including some protected species of trees, as part of a plan to develop the Las Crucitas gold mine, has been suspended for nearly two years, as environmental activists have challenged the legality of the procedures by which the license and other permits were issued. Within hours of being sworn into office, Chinchilla issued a decree restoring a ban on all new open-pit gold mining, which had been lifted by Arias in 2008. Environmentalists contend that mining operations will destroy the habitat of endangered species, thereby undermining the countrys potential as a preferred destination for green tourists. The president declared the decree to be consistent with the publics rejection of extractive industries, which would seem to pretty much rule out any potential for
Forecast Scenarios
1-Oct-2010 Page 21

1-Oct-2010

flexibility. In any case, the dispute over Las Crucitas will likely warn off other potential investors operating in environmentally sensitive sectors. Despite the handicaps arising from PACs aggressive opposition strategy and the activist posture of the courts, the Arias administration succeeded in implementing policies that will contribute to an improved climate for business and trade going forward. The previous government took the first steps toward opening up the countrys telecommunications market under legislation that was approved as part of the process of implementing DR-CAFTA. In October 2008, the Public Services Regulatory Agency (ARSP) published new rules for companies in the sector that, among other things, require carriers to service all areas of the country, regardless of profitability, with resulting losses to be covered in part by a 1.5%3% tax on services. In addition, telecom companies will be required to ensure interconnectivity of their networks, and prohibitions on monopolies and other forms of unfair competition will be enforced by a new agency established to supervise the sector. Managers of the state-owned Costa Rican Electricity Institute (ICE), which was forced to surrender its monopoly over both telecommunications and electricity services as a result of DR-CAFTA-related reforms, expect that foreign firms will seek to partner with the domestic giant, rather than trying to compete head-to-head. Opportunities in the insurance sector will similarly expand as a result of legislation related to DR-CAFTA. The government has adopted a similar position in its efforts to secure legislative backing for reforms that would similarly enhance competition in the generation and distribution of electricity. Chinchilla argues that private companies would complement the role played by ICE, with the aim of ensuring that supply keeps pace with demand, and that contracts will be awarded on the basis of prices and quantities of electricity, with preference also granted to bidders making use of renewable resources. As in the case of the revised telecommunications law, the draft legislation requires the delivery of services to all areas, regardless of population density or income levels. The safeguards included in the draft legislation might be sufficient to sway reluctant lawmakers. However, there is still some question whether a supermajority is required to secure approval of the reform, which, if nothing else, means the measure is certain to be subjected to a court challenge if the government attempts to implement it on the authority of a simple majority. Efforts to implement tax reforms have been impeded not only by PAC, but also by the ML, which insists that a crackdown on tax evasionwhich by some estimates reduces government income by as much as 4% of GDP each yearis all that is needed to restore fiscal balance. That approach was the governments policy by default under both Arias Page 22 1-Oct-2010 Forecast Scenarios

1-Oct-2010

and his predecessor, Abel Pacheco. However, Chinchillas government will not be able to fully finance its spending pledges without broader tax reforms. The Finance Ministry has warned that the budget shortfall could increase to more than 6% of GDP in 2012 if proposed tax reforms are not approved. Many of the tax measures currently under consideration were first floated by the Arias administration. Among the most controversial are a tax on gambling enterprises and a special $300 levy on all registered businesses (regardless of size), the proceeds of which will be used exclusively for security-related spending. Other proposals include the replacement of the current 13% sales tax with a value-added tax (VAT), a financial services tax of 0.5%, and changes to the income-tax structure that would significantly increase the tax burden of those at the top of the income ladder. The government estimates that if enacted in its entirety, the tax-reform package will boost state income by 2.5% of GDP annually. Chinchilla is counting on a heightened sense of urgency to ensure that she succeeds where her predecessors failed. In that regard, she has gained potentially helpful assistance from Rodrigo Bolaos Zamora, the head of the Central Bank of Costa Rica (BCCR), who has warned that Costa Rica will be in very deep financial trouble if tax reforms are not implemented by the end of 2011. Despite such forecasts of doom, the tax proposals have encountered resistance from both the left and the right. Even if the Legislative Assembly approves the tax measures, rapid implementation is not assured. Under Costa Rican law, any single lawmaker (or any private citizen, for that matter) can challenge the constitutionality of measures passed by the Legislative Assembly on either substantive or procedural grounds, thereby forcing a review by the courts that can take several months to complete, even in cases where the soundness of the law is confirmed. Given the uncertain outlook for the tax reforms, no significant improvement in fiscal stability can be expected until DR-CAFTA begins to yield the promised benefits, which seems unlikely before 2012 under the best-case scenario. The near-term rise in the publicdebt burden poses some danger of currency volatility, but the BCCRs ample supply of reserves will limit the danger of even a temporary tightening of exchange controls. Much Resistance to Free Trade Not all recent efforts to expand trade ties have been as frustrating as the battle to win ratification of DR-CAFTA. In October 2008, Costa Rica ratified a free-trade agreement (FTA) with Panama, its most important regional trading partner, under which tariffs on
Forecast Scenarios
1-Oct-2010 Page 23

1-Oct-2010

80% of agricultural products and 93% of industrial goods were lifted immediately, with the phased elimination of all remaining tariffs to be completed by 2025. Chinchillas foreign minister, Ren Castro, has already traveled to Seoul, and reached an agreement to begin negotiations on an FTA with South Korea, and Costa Rica and Canada are preparing to discuss an expansion of their bilateral agreement to include investment and trade in services. However, the outlook for securing ratification of the FTA with China and a regional association agreement with EU are less than bright. The potential benefits for China are enormous, in that it would provide the country with an investment and trade platform within the DR-CAFTA structure. For its part, Costa Rica could expect a significant boost in FDI, as Chinese firms sought to exploit that advantage. However, the trade benefits for Costa Rica are less clear-cut. China is Costa Ricas second most important international customer after the US, with electronics components accounting for the lions share of exports to China. Agricultural exporters are keen to gain increased access to the Chinese market, where demand has been much more stable than in the US during the recent global downturn. However, many small manufacturers in Costa Rica are rightly concerned that they will be driven out of business if Chinese goods are granted duty-free entry to the country. Not surprising, the treaty with China has met with strong resistance from elements within Costa Ricas Chamber of Industries, most notably food producers, who have complained that the labor standards imposed by the US under DR-CAFTA will make it impossible to compete with Chinese goods produced with much cheaper labor. In late August 2010, the Chamber presented its argument to the Legislative Assembly, contending that more limited commercial agreements with China would be far more beneficial for Costa Rica than a comprehensive FTA. The deal with the EU faces fewer obstacles, and is widely viewed by the business sector as an opportunity to boost investment and jobs without significantly undermining the competitiveness of key domestic industries. Nevertheless, as was made evident during the prolonged political battle over DR-CAFTA, the PAC is unlikely to back either of the deals. The ML, which favors expanded trade ties, proved during the struggle to secure ratification of DR-CAFTA that its support will require concessions in other policy areas, most likely with regard to the governments proposed fiscal reforms. If the ML demands more than Chinchilla is willing to concede, ratification of the trade deals will require the support of at least two of the smaller parties, a development that would bestow upon them unexpected leverage that they will undoubtedly exploit to the hilt. Page 24 1-Oct-2010 Forecast Scenarios

1-Oct-2010

Thus, while Chinchilla is keen to implement the deals, she cannot count on majority backing for ratification. The FTA with China is clearly the most controversial, and the combined opposition of the PAC, environmentalists, and domestic business groups may be more than the new administration can overcome. Drug Violence a Serious Concern Potential threats to domestic stability include the potential for dangerous tensions arising from increased unemployment, wide income inequalities, and the increasing number of Costa Ricans living in conditions of poverty. Arias was prepared to grant higher priority to social policy even before the fallout from the global economic downturn pushed the government to unveil its so-called Shield Plan in January 2009, and significant increases in social spending were included in the 2010, as well, and will be maintained in 2011. Reflecting Arias position that education is the only proven antidote to poverty, the current years budget includes substantial increases in funding for a secondary school grants program, school construction, and new teachers. The governments social welfare policies have taken on added importance under the new administration, as they are an essential component of her security strategy, an issue of growing concern among all sectors of Costa Rican society, but especially among the business community, which recognizes the potential for heightened insecurity to deter investment and discourage tourism, one of the countrys most important industries. Although property-crime numbers are rising, the more troubling element of the problem is that Costa Rica has become a battleground in a spreading war among gangs fighting for control of the illegal drug trade between South and North America. Chinchilla has adopted a two-track approach to addressing crime. On the one hand, the government is pushing for tighter law enforcement. During her first 100 days, she authorized the hiring of hundreds of new police officers and established the funding to increase prison capacity. On the other hand, the president has stressed the need to attend to the social causes of crime. Chinchilla contends that security issues cannot be divorced from the conditions of poverty and inequality that breed crime, and has argued that a strong social safety net and an economic program that promotes healthy economic development are essential elements of an effective anti-crime strategy. As for the threat posed by drug-related violence, Chinchilla declared in an Independence Day speech that Costa Rica was no longer immune from the epidemic of deadly violence that has driven up the murder rates in Guatemala and El Salvador. Warning that Costa Ricans must not kid ourselves, she stated that the government is at the point of losing
Forecast Scenarios
1-Oct-2010 Page 25

1-Oct-2010

measures of control over sovereignty, territorial spaces, and the integrity of its institutions. Critics lambasted the speech as overblown fear-mongering that would unjustifiably stigmatize Costa Rica, and castigated Chinchilla for failing to propose any solutions beyond increased spending on social programs. However, just days after the presidents speech, Costa Rica was for the first time ever identified by the US as a major world transit point for drug-trafficking. Officials in Washington were quick to point out that the designation was not a criticism, but rather a function of geography, and praised Chinchillas government for granting such high priority to security. Officials in San Jose are hoping that US recognition of Costa Ricas vulnerability will translate into US support (financial and otherwise) that bolsters the governments efforts to improve security. Chinchilla has seized the opportunity, immediately dispatching Security Minister Jose Maria Tijerino to Washington in search of help from the US. Costa Rican police have established a more visible presence on the northern border with Nicaragua, following kidnappings and ransom demands emanating from armed groups in Nicaraguan territory. Separatist rebels in the Nicaraguan territory of Airrec occasionally clash with both Nicaraguan and Costa Rican police forces. The Costa Rican government has downplayed the political component of the violence in the region, characterizing the armed bands in Airrec as smugglers. The rebels contend that police provoke clashes by harassing Airrec farmers seeking to carry out legal trade, by confiscating their goods as contraband. The danger that a conflict with the rebels may touch off disruptive turmoil appears to be quite small. The risk of conflict with Nicaragua over Costa Ricas use of the San Juan River, which forms the boundary between the two countries but is entirely in Nicaraguan territory, has diminished since July 2009, when the International Court of Justice (ICJ) ruled that Costa Ricans (with the exception of police personnel or those transporting supplies for police posts) are free to navigate the waterway, while acknowledging that Nicaragua is within its rights to regulate and monitor traffic along the river. However, Ortega is currently dealing with the controversy over his effort to run for re-election in 2011, and the possibility that he might attempt to deflect popular hostility by manufacturing a dispute with Costa Rica cannot be ruled out. Although such a development could negatively affect internal commerce, the chances of an outbreak of armed conflict would be remote. Economy Will Perform below Potential The wide swings in growth in recent years underscore the massive impact of one companyIntelon the countrys economy. The vulnerability of the economy to Intels
Page 26 1-Oct-2010
Forecast Scenarios

1-Oct-2010

performance has reinforced the desire to expand the scope of foreign investment, but political impediments will limit the opportunities available to investors. Real GDP growth slowed to 3.7% (year-on-year) in the second quarter of 2010, after rebounding to 6% in the first quarter of the year. The most recent data for the monthly index of economic activity (IMAE) confirmed that the declining trend continued into July, with the figures for agriculture, manufacturing, hotels, and financial services all slightly lower than in June, while the pace of contraction in the weakest sectors, most notably construction, barely slowed. The government has raised its forecast for annual real GDP growth in 2010 to 4.5%, and sees the growth rate reaching 5% in 2011. However, these optimistic projections assume a continued improvement in external conditions, in general, and a solid recovery in the US, in particular. Given the debt troubles in the EU, which point to a stalling of the economic recovery in Europe, the uncertain fate of the FTA with China, and the questionable sustainability of the US recovery, the official forecast is probably too optimistic. Although government spending will boost the domestic contribution to growth, the pace of expansion will be held to less than 4% in 2010. Chinchillas ability to rely on fiscal tools to spur significantly faster growth in 2011 will depend on the fate of the administrations tax measures, which remains quite uncertain. Even in a best-case scenario, securing approval of the tax reforms will likely necessitate changes that reduce the revenue-generating potential of the measures, making it difficult to narrow the large deficit without cuts to spending. On that basis, and assuming the continued sluggishness of US and European demand, real GDP growth will be held to 3.5%4% once again next year. Inflation eased to slightly more than 4% (year-on-year) in December 2009, holding the annual average rate to 8%, the lowest figure in decades, but still the highest rate in Central America last year. Weak domestic demand and the significant appreciation of the local currency since July have contributed to lower inflation in recent months. The consumer price index rose by just 5% (year-on-year) in September, bringing the average for the first nine months of the year to 5.6%, below the upper end of the central banks target range of 4%6%. The inflation rate is expected to trend upward over the remainder of the year, mainly owing to the base effect, but the annual average increase in consumer prices is forecast to remain close to the 6% target. The growth outlook for 2011 suggests that demand pressures will remain under control next year, although fairly robust state spending and a weakening of the colon is expected to push the inflation rate above 6%. The implementation of DR-CAFTA will encourage increased investment in sectors liberalized under the terms of the treaty (notably telecoms and insurance) once the global Forecast Scenarios 1-Oct-2010 Page 27

1-Oct-2010

economic and financial turmoil subsides, creating the potential for a stronger recovery over the medium term. However, progress on this front will be delayed in the event that the US economy slows again in 2011. The unevenness of economic expansion, the governments reluctance to pursue privatization, environmental restrictions that deter development of extractive industries, and the wariness of investors amid political and fiscal uncertainty will create impediments to robust growth. Nevertheless, the countrys political stability and relatively skilled labor force will attract some foreign investment, putting a floor under the risks of a prolonged downturn. Even if growth rates accelerate to 5% later in the forecast period, the weak performance in 20102011 will hold the average rate of expansion to 4.3% per year through 2015, a far cry from the 6.6% average for 20032007, and well short of the level necessary to make a significant positive impact on living standards. A rising debt burden will generate pressure to re-establish fiscal discipline, which will become necessary to stave off destabilizing currency volatility. The increased flexibility enjoyed by monetary authorities following the adoption of a crawling band in October 2006 will facilitate efforts to control inflation over the medium term, but the decline will be gradual, with the average rate for the five-year forecast period coming in at 6.8%. More Manageable External Deficits The trade deficit narrowed significantly in 2009, as imports fell much more sharply than exports, reflecting the impact of weaker domestic demand and lower prices for staple imports. Weaker flows of remittances and income from tourism resulted in somewhat smaller surpluses in the services and transfers balances that in combination with an expansion of the income deficit contributed to a less pronounced (but nevertheless substantial) reduction of the current account deficit in 2009. Exports to China, Costa Ricas second most important trade partner after the US, increased by 13% in 2009, and will continue to grow this year, regardless of the extent of progress on ratification of the FTA. However, the continued weakness of US and European demand will dampen overall growth of exports, while higher global prices for commodities will contribute to a more rapid recovery of imports, resulting in a larger trade deficit that will widen the current account shortfall to $920 million, equivalent to about 3% of GDP, in 2010. The slow but steady recovery of the economy will be accompanied by a gradual strengthening of domestic demand that will fuel growth of imports, resulting in a further increase in the external deficits in 2011. Over the medium term, the eventual implementation of an FTA with China and the return of sustained moderate growth in the US will boost exports, but strengthening domestic demand, the increased access of cheaper foreign goods, and higher external
Page 28 1-Oct-2010
Forecast Scenarios

1-Oct-2010

interest rates (which will add to the debt-service burden) will contribute to the maintenance of a sizeable current account deficit averaging $1.8 billion, equivalent to somewhat more than 4% of GDP. Assistance from international financial organizations and others will be needed to help finance the governments investment program. A serious retreat from the pursuit of market reforms could damage relations with bilateral foreign donors, the IMF, the World Bank, and the IDB. The government will take advantage of a recent upgrade in the countrys credit rating to swap some of its large domestic debt for cheaper external financing, a strategy that will ease pressure in the near term, but could create problems over the medium term in the absence of fiscal reform. Second Most Likely Regime Scenario 18-Month Forecast Period: Centrist Coalition (30% Probability) Five-Year Forecast Period: Centrist Coalition (25% Probability)
Centrist Coalition 2010 2011-2015 Growth (%) 4.3 4.7 Inflation (%) 5.9 6.0 CACC ($bn) -1.35 -2.00
Chinchillas assumption of the liberal economic policy stance adopted by Arias has created a basis for cooperation with the ML, which has displayed greater flexibility on the matter of state intervention following a 2005 split that resulted in the departure of its hard-line libertarian faction. During Arias term, the PLN, the ML, and the PUSC on occasion came together to provide the government with a two-thirds legislative majority, and a similar combination could provide the basis for winning approval of controversial reform legislation under Chinchilla. Although the formation of a long-term partnership among the PLN, the ML, and the PUSC would enable the government to win passage of most measures, some dilution of legislation would be inevitable. In any event, the relationship would be far from harmonious, and the alliance would face the constant threat of collapse, particularly given the likelihood that the PAC would seek to mobilize organized labor and other pressure groups to assist in its efforts to thwart the governments agenda. Barriers to Foreign Investment and Trade Although Arias was a firm believer in liberal reforms, and Chinchilla has pledged to maintain the policy course he set, the commitment of the broader PLN membership to that agenda is a matter of some doubt. The PLN has advocated protective tariffs for the countrys farmers and restrictive environmental standards for foreign investors. It has
Forecast Scenarios
1-Oct-2010 Page 29

1-Oct-2010

been a driving force behind efforts to bar foreign companies from undertaking exploration projects for oil and gas. Likewise, although the PLN has shown a willingness to open some state enterprises to competition, it is opposed to privatization of stateowned utilities. Thus, although there is the potential for the PLN to find common ground with the ML on policies related to foreign investment and trade, differences between the parties (and among factions within the PLN) over the details of economic policies would give rise to frequent battles that would require compromise. Moreover, intense public opposition (encouraged no doubt by the PAC) would make the government wary of moving aggressively even in cases where broad consensus existed. Economic Performance Would Be Better, but Still Disappointing Economic prospects would be moderately more positive under this regime (although not in the early part of the forecast period), particularly if the government succeeded in implementing fiscal reforms that eased debt pressures and provided the government with greater flexibility to make investments that might help to make the business climate more attractive to foreign investors. However, the ambivalent stance of the PLN toward foreign investment and the advocacy of some members for protectionist trade policies would limit the investment opportunities in the country and would contribute to continued wariness on the part of investors. As a result, growth rates, although higher under this regime, would remain below potential, as the economy expanded by an annual average of 4.7% through 2015. Higher taxes and controls on government spending would dampen price pressures, contributing to a reduction of inflation to an annual average of 6% over the forecast period. The healthier performance of the economy would boost domestic demand, giving rise to persistently large trade deficits. Although receipts from tourism would partially offset the impact on the current account balance, the exchange of domestic debt for lowerinterest foreign debt would increase external debt service requirements later in the forecast period, contributing to deficits averaging $2 billion annually through 2015. Third Most Likely Regime Scenario 18-Month Forecast Period: PLN-PAC (10% Probability) Five-Year Forecast Period: PLN-PAC (10% Probability)
PLN-PAC 2010 2011-2015 Growth (%) 2.9 3.3 Inflation (%) 5.2 9.5 CACC ($bn) -0.75 -2.25
The PLN and the PAC are in general agreement on many issues. In fact, Sols pledged his partys support for several of the governments proposed initiatives early in Arias term, and the successful implementation of DR-CAFTA has eliminated the most prominent Page 30 1-Oct-2010 Forecast Scenarios

1-Oct-2010

obstacle to such an alliance. But even as a medium-term strategy, the potential for a PLNPAC coalition would be limited by disagreements over privatization, investment liberalization, and fiscal reform. To the extent that a partnership with the PAC would raise serious doubts about Chinchillas willingness and ability to fulfill her more liberal campaign pledges, the move could seriously undermine her credibility. However, if she confronted a hopelessly gridlocked legislature, she might be willing to take that chance, seeing a coalition with the PAC as the least bad alternative. A Wary Attitude toward Foreign Investment The inclusion of PAC within the government would discourage any bold moves in the direction of investment and trade liberalization, reducing the prospects of any significant improvement in the climate for business under this scenario. Foreign investment would be promoted only within narrow limits, and progress toward free-trade agreements would be slowed, if not stalled altogether. At the same time, this government would work to reduce the chronic corruption that thwarts more substantial economic development. It is generally accepted that corruption is directly related to the countrys debt difficulties. If implemented effectively, a clampdown on corruption could help put more money in the government coffers. However, demands from PAC and the PLNs left wing for increased social expenditures would contribute to persistent budget pressures that would offset gains that might be realized from a closer watch over public funds. Moreover, the failure of this regime to implement encompassing fiscal reforms would limit the governments ability to increase spending without creating a significant expansion of the fiscal deficit, compounding the problems stemming from the high level of public-sector borrowing. Slow Steps on Trade Liberalization A substantial trade deficit, the need to increase government revenues, and the policy leanings of many PLN and PAC members would impose powerful constraints on trade liberalization. The government might reduce some tariffs as part of its drive to rein in inflation. On the other hand, it would try to curtail imports of luxury goods and automobiles and to reduce the trade imbalance. It would pursue both goals in order to maintain the countrys creditworthiness, and limit the risk of any increase in payment delays. Lackluster Growth, Higher Inflation The composition of this regime would dampen the prospects for bold new measures that might build a foundation for sustained economic growth. Although the PACs inclusion in the government might lead to improved cooperation on some issues, frequent battles would be the norm, and the governments majority would not count for much in cases of Forecast Scenarios 1-Oct-2010 Page 31

1-Oct-2010

disagreement between the PLN and the PAC over issues of importance to Sols. Thus, while the administration would be able to move graduallyand gentlyin the direction of easing investment and trade restrictions, major reforms required to bolster the economic base would be unlikely. Real GDP growth would average 3.3% annually through 2015. Inflation would average close to double digits as the government failed to address the source of chronic fiscal strains. Although the slow pace of trade liberalization and efforts to use tariffs to curtail some imports would prevent the rapid expansion of the trade deficit, the disappointing performance of the export sector and a relatively larger debt-service burden would contribute to current account deficits averaging $2.25 billion annually.
Page 32 1-Oct-2010
Forecast Scenarios

1-Oct-2010

Forecast Summary
SUMMARY OF 18-MONTH FORECAST Divided Government 60% SLIGHTLY MORE Same Same Same Same Same SLIGHTLY LESS SLIGHTLY LESS Same MORE SLIGHTLY MORE SLIGHTLY MORE Centrist Coalition 30% SLIGHTLY MORE Same SLIGHTLY LESS Same Same Same SLIGHTLY LESS SLIGHTLY LESS Same SLIGHTLY MORE SLIGHTLY MORE Same PLN-PAC 10% SLIGHTLY MORE Same SLIGHTLY MORE SLIGHTLY MORE Same SLIGHTLY MORE Same SLIGHTLY MORE SLIGHTLY MORE MORE SLIGHTLY MORE SLIGHTLY MORE
REGIMES & PROBABILITIES RISK FACTORS CURRENT Turmoil Investment Equity Operations Taxation Repatriation Exchange Trade Tariffs Other Barriers Payment Delays Economic Policy Expansion Labor Costs Foreign Debt Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Moderate Low Low Low
SUMMARY OF FIVE-YEAR FORECAST Divided Government 65% Same Same Same SLIGHTLY MORE Same Centrist Coalition 25% Same Same SLIGHTLY LESS SLIGHTLY MORE Same PLN-PAC 10% Same Same Same MORE SLIGHTLY MORE
REGIMES & PROBABILITIES RISK FACTORS BASE Turmoil Restrictions Investment Trade Economic Problems Domestic International High High Moderate Moderate Moderate
* When present, indicates forecast of a new regime
Forecast Scenarios
1-Oct-2010 Page 33

1-Oct-2010

Costa Rica Real GDP Growth Under Alternative Regimes

Divided Government Centrist Coalition PLN-PAC
10.0 8.0 (percent) 6.0 4.0 2.0 0.0 -2.0 2005
2006
2007
2008
2009e
2010f
20112015f
Costa Rica Inflation Under Alternative Regimes

14 13 (percent) 12 11 10 9 8 7 6 5 2005 2006 2007 2008 2009e 2010f 20112015f
Costa Rica Current Account Under Alternative Regimes

-0.5 -1.0 ($billions) -1.5 -2.0 -2.5 -3.0 2005
2006
2007
2008
2009e
2010f
20112015f
Page 34 1-Oct-2010
Forecast Scenarios

1-Oct-2010
Costa Rica
Country Forecast
Political Framework
Players To Watch
Laura Chinchilla Miranda: A former vice president and minister of justice, Chinchilla won the 2010 presidential election in the first round, taking slightly less than 47% of the vote. She based her entire campaign on a promise of continuity with the policies of the outgoing administration headed by Oscar Arias, which in the main sought to create a more attractive and competitive environment for private business, while affirming the governments responsibility to pursue policies aimed at reducing poverty and ameliorating the hardship of those that remain poor. Chinchilla has pledged to implement fiscal and labor-market reforms, but like Arias and his predecessor, Abel Pacheco, she will not be able to count on the reliable support of a majority in the legislature, a fact that dims her prospects for success National Liberation Party: The center-left PLN retained its status as the largest party in the Legislative Assembly at the February 2010 elections, but lost one seat, reducing its total to 24, five short of a majority in the 57-member chamber. Not all of the PLNs lawmakers are as committed to investment and trade liberalization as Chinchilla, a factor that created difficulties for Arias throughout his term, and will likely cause headaches for the new administration, as well Libertarian Movement: The party has moderated its hard-line libertarian stance since a factional split in 2005, and won nine seats in the Legislative Assembly at the February 2010 elections. The government is counting on the backing of the ML to secure approval of its agenda, but a proposal to hike taxes while also tolerating a near-term expansion of the fiscal deficit has run into strong opposition from the ML, which espouses the principles of limited government and fiscal restraint. In general, the ML can be expected to bargain hard for its support on a case-by-case basis, resulting in prolonged delays in implementing policy Citizen Action Party: The PAC remains the second largest party and the leader of the opposition, despite a loss of six seats at the 2010 elections that reduced its total to 11. Although the similar positions of the PLN and the PAC on government spending priorities provide some basis for cooperation between the two parties, their differences on the issues of investment and trade liberalization will limit the potential for such an alliance during the current term Social Christian Unity Party: The PUSC represents the more conservative elements in Costa Rica and in general supports free-market policies. The PUSC won six seats at the 2010 elections, enough to provide the government with a simple majority, and might exert some influence over the direction of policy if Chinchilla cannot gain the cooperation of the ML
more on these and other Players in the Political Players section
Political Framework
1-Oct-2010 Page 35

1-Oct-2010

Political Players Business Groups The Union of Costa Rican Private-Sector Chambers and Associations (UCCAEP) represents a wide variety of business interests. Its president, Samuel Yankelewitz, is a prominent businessman who wields considerable political influence. The chambers actively bargain with government and labor over public policy and wage and contract disputes. They also attempt to influence public opinion through vigorous public relations campaigns. Additionally, they serve as forums for local business leaders. The growth of the Solidarity Movement has led labor and business to unite in their demands on the government. The chambers sometimes differ, depending on each associations primary interest, on issues such as higher taxes and import limits, but there is general agreement on issues of privatization, reduction of government employment, structural adjustment programs, and trade liberalization. Business leaders responded to Pachecos Cabinet appointments, which included prominent members of the business community and advocates of liberal reforms, with enthusiasm, and applauded his inclusion of two members of the PLN in the government. The Chamber of Commerce has long been an important interest group, seeking to influence domestic policy rather than foreign trade, investment, or financing. The chamber is the principal organization advancing the interests of San Jos merchants and other domestic commercial enterprises, increasing prices and restricting clientele in the Free Zone of Golfito, which was considered a major competitor to traditional merchants. Most of the larger exporting companies belong to the Chamber of Exporters (Cadexco), founded in 1982 and currently headed by Antonio Burgues Teran. This chamber promotes exports, working directly with the government on export policy. It employs a three-fold strategy: direct lobbying, campaigning to influence public opinion, and serving on mixed commissions of government and private sector personnel. These commissions help to set tariffs and devise policies on the transfer of technology, as well as lobbying and negotiating with key trade partners. The chamber produced most of the technical reports the government has used in regional and global trade negotiations. Members have been active in their efforts to obtain concessions from the EU on imports of bananas from Latin America. The Chamber of Industries (CICR), founded in 1943 and currently headed by Jack Liberman, advises and promotes more than 750 companies. It advocates industrial development and lobbies for industrial interests. The association lobbies government and Page 36 1-Oct-2010 Political Framework

1-Oct-2010

participates directly in advisory bodies formulating government policies. Representatives of the chamber took part in WTO negotiations. The chamber maintains a library for members and publishes reports, a monthly magazine, and a weekly full-page editorial in the leading San Jos newspapers. It also works with the Coalition for Development Initiatives, the University of Costa Rica, and the National Institute of Administration in initiating management-training programs. The economic importance of tourism enhances the influence of the Chamber of Tourism (Canatur), currently headed by Eduardo Villafranca. The chamber has worked to improve infrastructure, enhance security for tourists, and create more efficient management of the national parks. In the wake of soaring cancellation and vacancy rates after two tourists were kidnapped in early 1996, the chamber urgently sought government assistance to rehabilitate the countrys reputation for security. Canatur has been an active participant in the successful campaign to restrict exploratory drilling by foreign oil companies, claiming that the detrimental environmental impact will undermine the countrys ability to market itself as an attractive site for ecotourists. Laura Chinchilla Miranda (President) A former vice president and minister of justice, Chinchilla won the 2010 presidential election in the first round, taking slightly less than 47% of the vote. She based her entire campaign on a promise of continuity with the policies of the outgoing administration headed by Oscar Arias, which in the main sought to create a more attractive and competitive environment for private business, while affirming the governments responsibility to pursue policies aimed at reducing poverty and ameliorating the hardship of those that remain poor. Chinchilla has pledged to implement fiscal and labor-market reforms, but like Arias and his predecessor, Abel Pacheco, she will not be able to count on the reliable support of a majority in the legislature, a fact that dims her prospects for success. Chinchilla was born on May 28, 1959. After graduating from the University of Costa Rica, she attended Georgetown University, where she earned a masters degree in public policy in 1989. In 1994, Chincilla was appointed deputy minister of public security, and was later promoted to the top post at the ministry. She contested and won a seat in Congress for the first time in 2002, and in 2006 was chosen by Arias as his first vice president, a position she held until late 2008, when she stepped down in preparation for her presidential run. Helped by the presidents endorsement, Chinchilla defeated San Jos Mayor Johnny Araya in a primary election held in June 2009. Citizen Action Party (PAC) Partido Accin Ciudadana remains the second largest party and the leader of the opposition, despite a loss of six seats at the 2010 elections that reduced its total to 11. Political Framework 1-Oct-2010 Page 37

1-Oct-2010

Although the similar positions of the PLN and the PAC on government spending priorities provide some basis for cooperation between the two parties, their differences on the issues of investment and trade liberalization will limit the potential for such an alliance during the current term. Formed in January 2001, the Partido Accin Ciudadana was in many respects the real winner at the February 2002 elections, as the strong showing of its founder and presidential candidate, Ottn Sols, forced the first presidential run-off in the countrys history, and the party won 14 of the 57 seats in the Legislative Assembly, creating a fairly equal three-way division of power that ensured it would wield influence over the direction of the governments policies. Purportedly representing a third way between the center-right PUSC and the center-left PLN, there was more than a hint of populism in the partys platform. Pledging to put people before profit, the PAC came out in favor of higher import tariffs and stiffer environmental regulations for foreign investors. Although the party called for a reassessment of plans for a free-trade agreement with Canada, PAC members gave their approval to the pact in late July 2002, after the government overcame the objections of the countrys potato farmers. The partys early support came primarily from younger and better-educated urban voters, and from the professional and intellectual classes who were attracted by the partys promise to breathe new life into a political system grown stale from corruption and patronage. However, the PACs popular support declined rapidly after the elections, as the hopefulness among the electorate reflected in the partys strong showing gave way to voter apathy. The PAC won only three of the 71 mayoral races run in December 2002, and a poll conducted in early 2003 showed its support in low single digits, compared to the 21.9% of the vote it won in 2002. The partys troubles were compounded by factionalism that emerged in response to Sols heavy-handed exertion of control. In February 2003, six of the PACs 14 legislators bolted the party, subsequently forming the Patriotic Parliamentary Bloc (PPB). Corruption scandals involving former PUSC and PLN presidents, together with divisions that emerged within the PLN over Arias controversial bid for a second term, provided Sols and the PAC with a golden opportunity for a revival by positioning the party as a third force untainted by past corruption. The PAC distinguished itself by staking out a position in opposition to DR-CAFTA, which Sols insisted should be renegotiated before being ratified. Although polls conducted immediately before the February 2006 election showed Arias enjoying a double-digit lead over the PAC leader, the race went down to the wire, with Arias winning by about 18,000 votes out of 1.62 million cast.
Page 38 1-Oct-2010
Political Framework

1-Oct-2010

More important, the PAC won 17 seats in the Legislative Assembly. Although not sufficient by itself to block legislation (even measures requiring a two-thirds majority), it ensured that the opponents of investment and trade liberalization, notably organized labor, would enjoy a strong voice in the Assembly. Disagreements between the PLN and the PAC on DR-CAFTA, and liberalization more generally, delayed the ratification of the trade deal and limited the Arias administrations ability to implement the liberal economic reforms required to create a solid financial basis for its social policy goals. Labor Powerful sectors of organized labor are adamantly opposed to investment and trade liberalization, and will attempt to intimidate the government into retreat through shows of force. The unions will seek to exploit the minority governments weak legislative position to block the implementation of reforms required under DR-CAFTA, and the potential for pitched political battles cannot be ruled out. Conflict between labor leaders and the government has escalated since 1996 over plans to sell state enterprises. Labor leaders are convinced that the governments program of privatization and free trade offers a bleak future for workers. President Miguel Angel Rodrguez, sought to gain consensus for privatization, but in the face of opposition from labor and other vested interests, failed to secure legislative approval for plans to privatize utilities and the national insurance company. Fiscal reform proposals put together at Rodrguezs request and inherited by Abel Pachecos administration explicitly ruled out the option of privatization as a means of easing budget strains. Organized labor expressed immediate dissatisfaction with Pachecos Cabinet appointments, which labor leaders claimed were weighted heavily toward advocates of the liberal reform policies pursued by Rodrguezs government. Throughout Pachecos tenure, labor leaders made good on their threat to exploit the divisions within the Legislative Assembly to force the governments retreat on such contentious issues as fiscal reforms and privatization. Libertarian Movement (ML) Movimiento Libertario has moderated its hard-line libertarian stance since a factional split in 2005, and won nine seats in the Legislative Assembly at the February 2010 elections. The government is counting on the backing of the ML to secure approval of its agenda, but a proposal to hike taxes while also tolerating a near-term expansion of the fiscal deficit has run into strong opposition from the ML, which espouses the principles of limited government and fiscal restraint. In general, the ML can be expected to bargain hard for its support on a case-by-case basis, resulting in prolonged delays in implementing policy. Political Framework 1-Oct-2010 Page 39

1-Oct-2010

The ML was founded in May 1994, but only emerged as a potentially influential player in 2002, when the party won six seats in the divided Legislative Assembly. However, the ML has been troubled by internal tensions that first became apparent in 2002, when one of the partys lawmakers defected shortly after the new Legislative Assembly convened. But the real upheaval came in summer 2005, when ML leader Otto Guevaras efforts to steer a more moderate course resulted in the departure of libertarian hard-liners, including the partys secretary-general and treasurer. In keeping with its libertarian roots, the ML supports free-market policies, and Guevara participated in rallies in support of DR-CAFTA during the 2006 presidential campaign. However, the party is an aggressive opponent of tax reform, particularly with regard to the introduction of new taxes or the expansion of existing taxes. Despite its limited legislative strength, the ML successfully prevented former President Abel Pacheco from implementing a sweeping tax reform program, using parliamentary tactics (such as tacking on dozens of amendments, all of which had to be debated and voted on) to slow the legislative process. When the package was finally approved in February 2006, the ML challenged it on constitutional grounds, and won a favorable ruling from the courts, which threw out the law in March 2006. National Liberation Party (PLN) The center-left Partido Liberacin Nacional retained both the presidency and its status as the largest party in the Legislative Assembly at the February 2010 elections. However, the party lost one of its seats, reducing its total to 24, five short of a majority in the 57member chamber. Not all of the PLNs lawmakers are as committed to investment and trade liberalization as President Chinchilla, a factor that created difficulties for Arias throughout his term, and will likely cause headaches for the new administration, as well Established in 1951, the PLN organized from the junta formed after the 1948 civil war as an anti-Communist, social democratic party favoring state ownership of critical public services and a reformist social program. With a constituency in the urban public sector and among intellectuals, industrial groups, and operators of large and medium-size farms, the PLN has won the presidency in eight of the last 13 elections, but has never held the top post for more than two consecutive terms. This reflects a traditional pattern of constant alternation of the party in power; no party or individual has controlled the government for as many as 12 consecutive years since Toms Guardias authoritarian regime of 18701882. In 1948, after a disputed election, Jos Mara Hiplito Figueres Ferrer (Don Pepe) led a popular revolution that set the stage for a democratic system when the victorious junta Page 40 1-Oct-2010 Political Framework

1-Oct-2010

drafted a constitution guaranteeing free elections and abolishing the army. Figueres became a national hero, winning the first elections under the new constitution. In 1990, the PUSCs Caldern won the presidency, but he failed to keep the party in power in 1994, losing to Don Pepes son, Jos Mara Figueres Olsen. The younger Figueres presided over a coalition government in which his PLN held a plurality. In the 1990 elections, the PLN was hurt by accusations of corruption and of links between PLN leaders and drug dealers, divisions within the party, and poor campaign strategy. The death of Don Pepe in June 1990 dealt a damaging blow to the party, and since then the PLN has lacked internal cohesion. Factional strains were aggravated by accusations of wrongdoing against the younger Figueres that led to a split over his presidential nomination in 1994. Another blow to party unity came in January 2005, when Arias won the partys presidential nomination, a development that irked many of the historically social democratic partys leaders, several of whom left the PLN in the weeks after the internal election. Among those who broke with the party immediately following Arias victory were Mariano Figueres Olsen, another of Don Pepes sons, who accused Arias of destroying the partys soul; Jos Miguel Corrales, a former presidential candidate who had been a member of the PLN for four decades; and the partys secretary-general, Luis Guillermo Sols. Later in the month, Luis Alberto Monge, the last surviving founding member of the party, announced that he too was leaving the PLN. In a scathing letter explaining his decision, Monge referred to Arias successful effort to get the courts to lift the one-term limit on the presidency as a political coup. Social Christian Unity Party (PUSC) Partido de Unidad Social Cristiana, commonly known as Unity, represents the more conservative elements in Costa Rica and in general supports free-market policies. The PUSC won six seats at the 2010 elections, enough to provide the government with a simple majority, and might exert some influence over the direction of policy if Chinchilla cannot gain the cooperation of the ML. The PUSC emerged in 1983, descended from a long line of coalitions opposed to the PLN government, and evolved into one of Costa Ricas two main parties. Its roots reach to the old Republican Party that dominated politics as far back as the late 1930s and was led by Caldern Guardia in the 1940s. At the 1990 elections, the PUSC won the presidency behind Rafael Angel Caldern Fournier and secured a majority in the Legislative Assembly, taking 29 seats to the PLNs 25. The situation was reversed in the 1994 elections, when the PUSC lost the presidency and 25 legislative seats (to 28 for the PLN),
Political Framework
1-Oct-2010 Page 41

1-Oct-2010

reflecting dissatisfaction with the Caldern administrations failure to implement its social program. The PUSC assembly unanimously named Miguel Angel Rodrguez its presidential candidate for 1998, its united front contrasting sharply with the divisions within the PLN. Although Rodrguez won the presidential election, the PUSC won the narrowest of pluralities in the legislature. The situation was much different in 2002, when the presidential primaries to choose the partys candidate for the 2002 elections created sharp divisions, as Pacheco defeated the candidate favored by Caldern. After winning the presidency by a fairly comfortable margin in a run-off against the PLNs Rolando Araya, Pacheco initially enjoyed strong approval ratings, which helped to promote unity within the PUSC. However, his room for maneuver was limited by the PUSCs control of just one-third of the seats in the Legislative Assembly, the result of the PACs emergence as a viable third party. Pachecos weakness as a leader, corruption scandals that engulfed the party, and a campaign financing scandal in which Pacheco was implicated all hurt the PUSC, which lost 14 of its 19 seats at the 2006 elections, initiating a decline that became more pronounced in 2010.
Page 42 1-Oct-2010
Political Framework
Copyright of Political Risk Yearbook: Costa Rica Country Report is the property of PRS Group, Inc. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.

Country Forecast

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Country Forecast

Hochgeladen von

Copyright:

Verfügbare Formate

Political Risk Services

Costa Rica Country Forecast

Liberia Alajuelaq Moin q Puntarenas q San Jos q Caldera

Political Risk Services

Export Market AB-

* Indicates forecast of a new regime.

Inflation % 11.2 5.8 6.8

Current Account ($bn) -1.39 -0.92 -1.80

Political Risk Services

Costa Rica Country Forecast

Security and Trade Issues

Political Risk Services

Costa Rica Country Forecast

Political Fact Sheet

Political Risk Services

Reproduction without written permission of The PRS Group is strictly prohibited.

Costa Rica Databank

1-Oct-2010 ~ Page 6-7

Political Risk Services

Reproduction without written permission of The PRS Group is strictly prohibited.

Costa Rica Databank

1-Oct-2010 ~ Page 6-7

Costa Rica Country Forecast

Regional Inflation Rates (2009): N&C America

Costa Rica Country Forecast

5716 4.9 11.2 6.0 20.9 -1.1 -5.4

Political Risk Services

Costa Rica Country Forecast

Political Risk Services

Political Risk Services

Costa Rica Country Forecast

Political Risk Services

Costa Rica Country Forecast

Comment & Analysis

Political Risk Services

Costa Rica Country Forecast

Political Risk Services

Costa Rica Country Forecast

Comment & Analysis

Political Risk Services

Costa Rica Country Forecast

Political Risk Services

Costa Rica Country Forecast

Comment & Analysis

Political Risk Services

REGIMES & PROBABILITIES

Political Risk Services

Costa Rica Country Forecast

Political Risk Services

Costa Rica Country Forecast

Political Risk Services

Costa Rica Country Forecast

Political Risk Services

Costa Rica Country Forecast

Political Risk Services

Costa Rica Country Forecast

Political Risk Services

Costa Rica Country Forecast

Political Risk Services

Costa Rica Country Forecast

Political Risk Services

Costa Rica Country Forecast

Political Risk Services