The Washington Diplomat / December 1998
By Larry Luxner
Costa Rica's recently appointed ambassador to the United States, Jaime Daremblum, promises his government will expand and strengthen his country's free-zone program while lobbying intensively for increased access to the U.S. market.
"One of the most important items of our economic policy agenda is the promotion and expansion of our economic policy agenda is the promotion and expansion of our trade exchanges with the United States," said Daremblum, speaking at an Oct. 28 breakfast sponsored by the Greater America Business Coalition at Washington's City Club.
"To accomplish this goal, our exports should have an ampler access to the U.S. market. At the same time, we need to prevent the sidetracking of capital investment flows that would otherwise come to Costa Rica if they didn't find more favorable conditions in Mexico because of the advantages created by NAFTA," the diplomat told his audience of 100 executives and potential investors. "For this reason, we are working together with the other countries of the region to obtain an effective parity of the Caribbean Basin Initiative (CBI) to NAFTA. Our products are good and competitive. The only thing we're asking for is a level playing field."
Daremblum, asked if he expects CBI-NAFTA parity to pass -- given the objections raised by many Democrats and some Republicans in Congress -- said "we have to keep pushing and lobbying. Hopefully, someday we'll prosper and have fruitful results, and that this issue will transcend local politics."
In his speech, Daremblum praised Costa Rica's long tradition of democracy and tolerance, noting that its 95% literacy rate is the highest in Latin America, its life expectancy of 76 years is the longest, and the infant mortality rate of 0.1 per 1000 is among the world's lowest. This is partly because Costa Rica, which abolished its army in 1948, spends only 0.6% of its GDP on defense -- the lowest proportion in the Western Hemisphere. Education, meanwhile, commands an investment equivalent to 6.5% of GDP, representing the largest proportion of the national budget ever earmarked for education.
At the same time, unemployment hovers around 5% -- a relatively low figure for Latin America -- while 1998 inflation isn't expected to exceed 10%. The current government's overall aim is to contain the deficit to around 3% of GDP this year, and bring it down even further next year.
"Now, at the threshold of a new century," said Daremblum, "the real challenge for Costa Rica is how to achieve higher rates of economic growth and social development in order to provide increased opportunities for advancement, and in general, higher living standards for all."
Efforts to attract overseas investment have been "highly successful," said the 58-year-old ambassador, who graduated from Tufts University's Fletcher School of Law and Diplomacy and has spent the last 35 years variously as a Fulbright scholar, lawyer, political science professor, economist at the IMF, columnist for both La Nación and The Wall Street Journal, and president of the Jewish Community of Costa Rica.
Five months ago, Daremblum was appointed by President Miguel Angel Rodriguez to be Costa Rica's ambassador to the United States.
"We are well on our way to transforming Costa Rica into an industrial and high-tech based export economy," he said. "To be sure, agricultural and agro-industrial products still count for some 30% of our foreign trade -- bananas, coffee, flowers, ornamental plants, fruits and vegetables, processed and canned foods. But at least 60% of our exports are made of manufactured goods such as textiles and clothing, chemicals and electronic components. And this proportion has been increasingly significantly as Intel, Lucent Technologies, Acer, Abbott Laboratories, H.B. Fuller, Microsoft and other high-tech companies start and expand operations in Costa Rica."
In fact, Microsoft recently established a capital-risk fund to finance and back up Costa Rican software companies, which by 2000 are expected to produce some $200 million worth of software -- close to 2% of the country's GDP. Intel's investment in a computer-chip factory alone is expected to exceed $500 million, making it the largest single foreign investor in Costa Rica.
Last year, Costa Rica registered nearly $5 billion worth of exports -- the third-highest export per capita rate in Latin America, after Chile and Venezuela. Of this total, about 50% went to the United States, 21% to Europe and 15% to the rest of Central America, which Daremblum calls "an important market but with obvious limitations."
To increase the importance of value-added manufactured goods in Costa Rica's export picture, Daremblum wants to expand the country's free-zone system. At present, Costa Rica has eight free zones in which companies enjoy direct access to customs agencies as well as exemption from income tax: three in Alajuela, three in Heredia, one in Cartago and one in Puntarenas. In addition, two free-zone projects are under discussion: one in Cartago, the other in Puerto Limón. In 1996, the eight zones employed 24,500 people and exported $582.4 million worth of goods, most of it apparel for the U.S. market.
"We are creating the possibility of defining certain buildings and construction sites as free zones," said Daremblum. He conceded that while wages and fringe benefits are considerably higher in Costa Rica than in poorer countries such as Honduras and Guatemala, "I think we can compete because of our higher productivity. Stability is also an important variable."
Costa Rica, a major tourist destination, also lists environmental protection among its priorities. Interestingly, the West Virginia-sized country shelters more bird species than the United States and Canada combined -- and has more butterfly species than all of Africa. Today, over 25% of the country's land area is either protected or under a resource management program.
Total investment for infrastructure development comes to $1 billion for the next five years. Of this amount, over $400 million will be used for roads. Other important investments will be made for the expansion of airports ($180 million and seaports ($150 million). Railroads, telecommunications, water and power supply together will account for investments of over $200 million.
Regarding privatization of telecommunications -- a clear trend in the rest of Central America -- Daremblum conceded that progress has been limited.
"One of the biggest obstacles to privatization has been the trade unions," he said, adding, however, that "by 2000, we expect to privatize two bands of cellular phone service, by 2001 long-distance, and regular phone services thereafter. Daremblum noted that unlike the rest of Central America, Costa Rica has excellent telecom services and that "there's not much public dissatisfaction with the phones."
Nevertheless, Daremblum told executives that Costa Rica, which began liberalizing trade in the 1980s, has "demonstrated a clear determination to follow the rules of the multilateral trading system," thus encouraging further investment.
"Moving along this track, customs tariffs have come down considerably, to a range of 1% to 19% on average. The idea is to lower them to 10%. Non-tariff barriers are virtually non-existent. Furthermore, in 1994 Costa Rica completed a bilateral trade agreement with Mexico, and is about to complete similar agreements with the Dominican Republic, Panama, Chile and Trinidad & Tobago." Daremblum added that his country "is firmly committed to working together with the other 33 democracies of the Americas to further the negotiations for the Free Trade Area of the Americas by the year 2005."