By Tyler Sheets
In Central America, many people have been living in poor economic conditions long before, during, and likely after the global economic crisis. Poverty and crime rates are shockingly high, and markers for development put some Central American states at the bottom of Latin America. The global financial crisis only exacerbated the situation as the wealthy neighbor to the north lost an impressive amount of purchasing power. While the US wallet shrunk, one country in particular was well suited to weather the storm: Costa Rica. This tiny country of 4.5 million people is familiar with being uniquely happy in somber times and has sustained a uniquely strong economy during the past several years.
When it became apparent that the pilot of the Costa Rican economy during much of the past decade would be in San Diego, PROSPECT asked Dr. Francisco de Paula Gutierrez to offer his insight on the unique Costa Rican economy. Having been the Minister of Finance from 1996 to 1998 and the President of the Central Bank of Costa Rica from 2002 to 2010, Dr. Gutierrez now works as an academic and was gracious enough to give PROSPECT the opportunity to conduct an interview.
PROSPECT: In 2008, the global financial crisis put the brakes on investments around the world. Tourism was clearly affected and construction hasn’t fully recovered. With recovery in the United States always appearing just out of reach, how is Costa Rica prepared to cope with a planet in economic turmoil?
Francisco: I think we managed fairly well in 2008. We had a minor recession. GDP declined about 1 percent that year, but since then we’ve had a recovery. We’ve been growing at about 4 percent per year from 2010 to 2012. We’ve had a good fight on inflation so that after the crisis we ended up with lower inflation—and we’ve been able to sustain it. So the country seems to not be too hurt in the first round. The question now is what will happen in the world economy. We are well interconnected, mainly with the United States, so as long as the United States continues to grow at the pace they’re growing now (2 or 2.5 percent), it’s okay for us. But, if the world economy enters into a recession again we will be in a more difficult situation, because in order to face the 2008 crisis we had to use some of the degrees of freedom that we had in our economic policy, especially on the fiscal side.
PROSPECT: In what way was Costa Rica prepared?
Francisco: I cannot say that we were expecting the crisis. When I say that we were prepared, I mean that in 2006, 2007 and 2008, we had a fiscal surplus that gave us a lot of room to maneuver. We have moved to a more flexible exchange rate system and that helped us in the sense that when the pressure came, we had the exchange rate as a variable to adjust. We had room to increase the price of imports and decrease the price of exports in order to make Costa Rican goods more attractive for foreigners to purchase. The financial system was well capitalized, so when the crisis hit us we had a strong fall in the last quarter of 2008 just after Lehman and in the first quarter of 2009; but, then it started to recover again. Also, the economy is well diversified. The construction industry was affected, like you said, and so was the tourism industry, but other sectors of the economy continued to be active.
PROSPECT: Is there a particular sector of the economy that you are particularly optimistic about?
Francisco: All foreign direct investment sectors (FDI) are doing quite well. We have been attracting not only manufacturing activities but also service activities. There are a lot of companies that are moving to Costa Rica to have back offices, so that is generating employment and foreign exchange to be able to sustain the imports and exports. Tourism is recovering, and construction is recovering—but just a little bit. There was a lot of construction in the coastal areas mainly due to Americans investing there and that is gone.
PROSPECT: What impacts does the US fiscal policy have on the Costa Rican economy, and what changes would you like to see coming out of Washington that could benefit Costa Rica?
Francisco: The issue of fiscal policy is not so clear to me. What we would like to have is a clear road to the future. What I wouldn’t want to see again is the type of discussions that were held by the United States in late August in terms of fiscal deficit and fiscal budget, because that creates a lot of noise, and everything that creates noise in the financial system hurts us. When you create noise, people will look for safe assets, and we are a riskier country than the United States. Interest rates tend to increase, people get nervous and capital movements start to put a little more noise in the system. So, what I would like to see is for the US economy to grow. I don’t want to judge the fiscal policy in the United States, but what we would like to see is for it rise again as an engine in the world economy, which has not happened yet and appears like it is not going to be easy. There are a lot of things to resolve here, but what we would like to see as a country and as a region is an interconnection with the American economy—40 percent of our exports go to the United States.
PROSPECT: If the United States was to take a direction that would not benefit Costa Rica, are there alternatives and do you believe any of those would be beneficial? For example, moving closer to China or Brazil.
Francisco: What we have been doing is trying to diversify. It’s not easy, but the country already had the CAFTA agreement with the United States, and we have a free trade agreement and diplomatic relations with China. We are signing an association agreement with the European Union in June. The country is trying to have a well-balanced portfolio of free trade agreements. The problem with this crisis is that you are facing problems in Europe and you are facing problems in the United States, and China is the only one that continues to grow even though it’s slowing down a little bit. What isn’t as strong as we would like it to be is the relationship with the south of Latin America. We are better oriented towards the developed economies.
PROSPECT: Do you think Costa Rica could in fact increase economic relations with Southern Latin America?
Francisco: I think we can do something, yes. It’s a matter of opening up the borders and trying to interconnect with the entire world rather than just one or two or three blocks.
PROSPECT: Earlier you mentioned FDI as a particular sector that you believe Costa Rica can benefit from and that you are optimistic about FDI coming to Costa Rica. With 171 foreign franchises now operating in the country, how is an increase in foreign franchises such as McDonald’s or Carl’s Jr. impacting the opportunities of domestic entrepreneurs to compete in the Costa Rican market?
Francisco: I think they are forcing them to improve. Obviously the small entrepreneur could be affected, but competition always increases efficiency if you want to survive. I think the country has been benefiting from all the foreign direct investment in the sense that we are forced to provide quality if we want to compete. Also, the consumer becomes a little more sophisticated and demands quality. It does displace some activity, but it doesn’t destroy it all.
PROSPECT: Is there a real opportunity for the people to receive that level of quality, or is it undermined by the amount of capital?
Francisco: No, I think they can look for niches. Once you discover your niche, you can be productive and survive doing whatever you do but in a good way.
PROSPECT: The Costa Rican population seems to be one of the most adverse to the ratification of CAFTA. Has Costa Rica benefited from it, and do you believe that CAFTA could be used as a model for other developing blocks in order to increase trade with the free world?
Francisco: I think so, yes. We had a huge struggle to approve it. It was not easy—we ended up doing a referendum. I was supporting it, but we won by just a slight margin. I think that this was based on a lot of misconceptions. People thought that it would change the whole way of life in Costa Rica, which is not true. I do think it has been beneficial for us, not in terms of trade just because we already had the Caribbean Basin Initiative and a preferential access system. So in terms of trade, CAFTA basically guaranteed security that the concessions were no longer unilateral but were under an agreement. But, we also had new things, which I think are important. CAFTA has now opened up the telecom sector and we have opened up the insurance sector, which were both previously closed in the state, and I think we are really benefiting from that. CAFTA trade has imposed also a sort of discipline, in the sense that you have to operate by law and you cannot jump back and forth between industries. The only problem that we have with CAFTA as a region is that it came just two years before the crisis, so it is difficult to evaluate what the effects of CAFTA have been, because we face the recession.
PROSPECT: Did it increase sensitivity in the Costa Rican economy to fluctuations in the US market? In other words, did the global financial crisis affect Costa Rica faster and more quickly because of CAFTA?
Francisco: No I don’t think so because we were already integrated into the United States. What CAFTA did was basically provide an opportunity to continue growing under the same structure and help us in some sectors that opened up slightly.
PROSPECT: What has been the impact of Laura Chinchilla’s presidency on the economy, and has criticism of her been too extreme, or has it been appropriate in certain cases?
Francisco: I think that people are a little hard on her. The expectations were quite high and she has had to face difficult times in terms of the fiscal situation. She has to manage and put forth a fiscal package—that is not simple. On the other hand, some of the criticism says that she is not taking strong action in terms of leadership, and I think this is also worth noting. She is working in a difficult time, but at this difficult time, one would like to see more force in some of the decisions.
PROSPECT: Is she having a difficult time because of leadership qualities she lacks, or is she finding too many roadblocks?
Francisco: I think the economic situation is not an easy one, especially the fiscal one. So, all the plans she had were postponed in order to fight for new revenues. Nobody wants to discuss taxes in our country.
PROSPECT: Do taxes need to go up?
Francisco: Yes. We used the fiscal space that we had in the first wave of the crisis and the country has a relatively low tax base, so if the country wants to have quality in education, quality in health, quality in roads and so on, we will have to pay for them.
PROSPECT: In challenges to the economic recovery, Costa Rica is well known and celebrated internationally for strong environmental regulations and protections. Have those protections benefited the country, or have they hindered the economy?
Francisco: I think that they have benefited. First, it is a national responsibility to be responsible with the environment. Second, they have put Costa Rica on the map with certain sectors that are important. The only problem is that sometimes we are a little extreme, and then we miss opportunities because we made the protection of natural resources the only issue. I want to be clear on this; for example, we had the opportunity of utilizing National Parks (volcanoes are usually National Parks) to produce geothermal electricity, but it is found in National Parks. So, there is a long debate in the country arguing that we cannot use it, that National Parks have to be protected because of the environment. But, as a result of not using them, we are burning fuel and damaging the environment. When you take these environmental regulations to an extreme, then it is a problem. I think Costa Rica has made, in the sense of placing the protection of natural resources as a top priority, a good decision.
Photo by Bruce Thomson