Back From the Brink
Edelman, Marc
" 0UR BEST INDUSTRY IS SANDINISTAS," a Costa Rican economic analyst told The Wall Street Journal in September.' Behind the sarcasm was a reality that was only too clear to Costa Ricans. Four...
...Only in mid-December 1984 was Costa Rica's Economy Minister able to cajole the other Common Market countries, some of which were facing similar World Bank demands, into making the required changes...
...tne PLN charged matra te Amencan Embassy, through its ambassador, has been disrespectful of our national sovereignty, pressuring us in the most vulgar form with the hunger of our people, applying to us what they don't apply to the North American people...
...9. The New York Times, December 15, 1980...
...The country's democratic political system and high standard of living earn it considerable international prestige and showcase status for U.S...
...Now there is no pessimism about the consolidation of our democracy.''"" IT IS IMPOSSIBLE TO UNDERSTAND COSTA Rica's economic recovery without examining the special role the country has come to play in U.S...
...In broad terms, U.S...
...fiscal years) "(millions of U.S...
...The government was forced to rely on more expensive commercial bank financing...
...Ana Sojo, Estado empresario y lucha politica en Costa Rica (San Jose: EDUCA, 1984...
...U.S...
...ECONOMIC ASSISTANCE COMES with strings attached...
...Wage rates favor investors rather than labor...
...ACAN (Panama City) August 20, 1984 in FBIS-LAM, August 22, 1984...
...The Wall Street Journal, September 19, 1985...
...and "Crisis econ6mica y transformaci6n social en Costa Rica," in Jorge Rovira, ed., Costa Rica hoy: la crisis y sus perspectivas (San Jos6: Editorial UNED, 1983), p.73...
...Four years ago this highly indebted country was on the verge of economic disaster...
...The government was forced to roll back electricity prices when consumers refused to pay the new higher rates, blockading major roads for two days...
...How the U.S...
...The state-owned CODESA ceREPORT ON THE AMERICAS 42M ONGE, CHARGING THAT THE IMF "HAS grabbed us around the neck," declared that he could not understand why the fund wanted to implement "dogmatic measures which tend to destabilize Costa Rican democracy...
...Private banks with col6n debts to the Central Bank would also benefit from expected devaluations...
...Department of State and U.S...
...The World Bank placed a series of particularly harsh conditions on an $80 million structural adjustment loan, payable over 20 years with five years grace...
...Given this volatile atmosphere and the approaching transition period between governments, the Reagan Administration's room for maneuver in Costa Rica is now greater than ever...
...But now the U.S...
...LARR-MCA, May 3, 1985...
...sentiments...
...But the prospect of using a portion of the new aid to cushion industry during the transition to export-oriented production proved attractive bait...
...Many Latin American countries have not yet arrived at an agreement as we have...
...Now we must resort to the political level so that the IMF and its authorities realize that there are certain conditions demanded by its experts with which we simply cannot comply because they would threaten the country's stability, would reverse the progress made thus far and would give us a bad image.' 2 Following Monge's outburst, a high-level Costa Rican delegation flew to Washington...
...Costa Rica's anti-Sandinista sentiment intensified in May after two civil guardsmen were killed by crossborder fire from Nicaragua...
...funds were to be used to pay CODESA's debts to the Central Bank prior to auctioning off its subsidiaries...
...Though the Costa Rican Army sided with the losers, the social democrats under Figueres controlled their own armed forces, and were able to implement a number of reforms that significantly undermined the oligarchy's power...
...4 With a population of 2.5 million, Costa Rica has become the second largest recipient of U.S...
...In August, shortly after this enforced decapitalization of the public sector, the longawaited World Bank loan was ratified...
...These conjunctural problems were, however, a reflection of longer term adverse trends...
...38basic foods and services within reach of virtually the entire population...
...I told Reagan he should understand how difficult congresses can be," the president told La Repdblica...
...Does not include a requested $9 million for "anti-terrorist" training...
...In the two-month civil war, Figueres' alliance defeated the forces of Picado and his Communist supporters...
...efforts to draw Costa Rica into its expanding campaign against Nicaragua have received wide attention Examined less often are the mechanisms that have contributed to the country's growing economic dependence on the United States...
...Only 362 new jobs were created by the three tropical plant companies for which data is available...
...I have learned," he added, "[that] Reagan himself has been directly intervening to obtain and channel these contributions...
...2 s In February AID created a commission to oversee the "privatization" of CODESA...
...The average real wage, however, is still below 1980 levels, which signifies that the living standards of much of the population have declined...
...Various studies indicated that in the 1970s, one-quarter to one-half of the country's families had incomes below what was considered the minimal subsistence level...
...Like many developing nations, Costa Rica sought salvation in now readily available foreign loans...
...In its first year, CINDE was instrumental in drafting a new foreign investment code granting special incentives to exporters.' 6 Closely linked to CINDE are a Presidential Export Office, the Center for Export Promotion (CENPRO) and a new Ministry of Exports and Investments, whose top officials are reportedly paid with AID resources...
...In the 1950s Costa Rica began to peddle beef internationally, and in the 1960s, with the U.S...
...5 By 1980, the public sector employed 20% of the workforce and produced 24% of all goods and services...
...The export of "non-traditional" items such as flowers, spices and tropical plants are the key to continuing long-term economic growth...
...In late 1980 inflation inArias: heir to social democratic tradition...
...6. Inter-American Development Bank (IDB), Economic and Social Progress in Latin America 1985 Report (Washington: IDB...
...Ironically, both Rafael Angel Calder6n Jr., of the Social Christian Unity Party (PUSC), and Oscar Arias of the ruling PLN hope to win by claiming the legacy of the welfare state...
...We've reached the bottom of the barrel...
...market assured by the Caribbean Basin Initiative (CBI...
...utility, food and fuel prices increased...
...Production of intermediate and capital goods remained relatively insignificant and for every $100 worth of output, Costa Rican industries required $80 worth of imported inputs and equipment.' Many manufactured goods were consumed domestically, contributing to a worsening balance of payments problem...
...The IMF now demanded a reduction of the deficit to 1% of GDP and a devaluation to 50 colones per dollar...
...military maneuvers and regional training programs and opposed the U.S...
...AID had insisted NOVEMBER/DECEMBER 1985 43SHADOW PLAY it had been waiting for the legislature to act, but in reality the $23 million had been secretly paid in early July...
...The fund made a series of what were described as "concessions" after Treasury Minister Porfirio Morera argued that added restrictions would lead to strikes and unrest...
...The United States has clearly decided to keep Costa Rica afloat as a counterweight to Nicaragua...
...We have already used all our arguments at the technical level...
...The negative trade balance was aggravated by the decision-reversed only in late 1980-to maintain the value of the col6n at 8.6 to the dollar...
...La Naci6n (San Josd), October 6, 1985...
...The deputies were cloistered for an entire weekend in the assembly, unable to go out for meals...
...One of Monge's main goals was to reach a new, more realistic accord with the IMF, facilitating a rescheduling of the foreign debt and the release of new capital...
...Asked on Panamanian television about his "secret for handling things *Seventy million dollars appropriated for FY 1982 under the so well with the U.S...
...Government subsidies placed REPORT ON THE AMERICAS *The one exception was the successive terms of PLN presidents Jose Figueres (1970-1974) and Daniel Oduber (19741978...
...Back From the Brink 1. The Wall Street Journal, September 19, 1985...
...The agreements signed and those pending are difficult, as they entail accepting certain cold, inflexible, and strict technocratic measures that do not take into consideration social and political realities...
...La Naci6n, September 1, 1985...
...Budget cuts were limited to $2 to $4 million, salaries were pegged to consumer price increases and a policy of continuing mini-devaluations was approved...
...On the post-civil war Junta see Jorge Rovira, Estado y political econdmica en Costa Rica 1948-1970 (San Jose: Editorial Porvenir, 1982), chapter 2. 4. Claudio Gonzilez-Vega, "Fear of Adjusting: The Social Costs of Economic Policies in Costa Rica in the 1970s," in Donald E. Schulz and Douglas H. Graham, eds., Revolution and Counterrevolution in Central America and the Caribbean (Boulder: Westview, 1984), p. 3 5 6 . 5. On CODESA see Mylena Vega, El Estado costarricense de 1974 a 1978: CODESA y lafracci6n industrial (San Jos6: Editorial Hoy, 1982...
...But the IMF extracted its own price...
...Circuito RPC Television (Panama), February 15, 1983 in Foreign Broadcast Information Service Latin America (FBISLAM), February 16, 1983...
...Within a month it became clear that certain targets specified in the accord, such as the "unification" of exchange rates, would not be met...
...After talks in mid-September, IMF directors overruled their own technicians...
...It was during the February to May transition period four years ago that Nicaraguan contras, whose activities had earlier only been sporadic, first established a major presence along the northern border...
...They also hoped to curb what they saw as the excesses of the large public sector which absorbed so much of the available credit...
...Embassy, San Jos6, September 1985, mimeo, and Table 2. See also Latin America Regional Report: Mexico and Central America (LARR-MCA) (London), November 30, 1984...
...compare with Juan Manuel Villasuso, "Evoluci6n de la crisis econ6mica en Costa Rica y su impacto sobre la distribuci6n del ingreso," in Rovira, p.207...
...Before Monge hands over power in May, his government may well face new pressures from the United States and multilateral lenders...
...Inexpensive foreign loans permitted increased public spending, and in 1977 coffee prices quadrupled over 1975 levels...
...Aid to Costa Rica, 1946-1986 (U.S...
...Government-established priorities would no longer determine how scarce dollars were allocated, and it would be impossible to control cross-border flows of capital...
...economic assistance over the three-year period is equal to 35.7% of operating expenditures...
...Embassy staff has grown from 35 in 1983 to 150...
...At the opening of negotiations for a new IMF pact, the fund demanded that the government lay off 3,300 employees, cut the higher education budget and raise taxes...
...fiscal conservatives, the IMF demanded in January 1984 that Costa Rica place a ceiling on the government deficit...
...resources and international credits...
...Debate is now heating up, however, because Calder6n, favored to win by a small margin in the latest polls, has taken a more bellicose position toward Nicaragua and is more closely identified with Reagan Administration positions...
...7. Helio Fallas, Crisis econdmica en Costa Rica, (San Jos&: Editorial Nueva D6cada, 1981), pp.106-109...
...government...
...In an effort to channel resources to other areas of the economy and to weaken the power of the oligarchy, the Junta nationalized the banking system...
...In return, the country was required to reduce Central Bank credit to the public sector, slash the government deficit, clean up the foreign debt backlog, increase dollar reserves (which had been completely exhausted), establish a single exchange rate and take other measures intended to stimulate exports and restrict domestic demand...
...Figueres was also head of the post-civil war Junta in 1948-1949 and president in 1953-1958...
...La Nacidn, October 21, 1985...
...And just as international interest rates were rising sharply, multilateral lenders were proving unwilling to float further loans...
...aid in Latin America, after El Salvador, and the second highest per capita recipient of U.S...
...Since the interest on the debt "consumes nearly all of the capital resources this country receives in loans and donations," he continued, it will be difficult now to fight the lending agencies for the "$150 to $200 million every year that we could devote to development programs...
...In June 1981, after nine months of negotiations, the Carazo government signed an agreement with the IMF which would have provided Costa Rica with up to $330 million over three years...
...Were the Sandinistas not in power just to the north in Nicaragua, there would be no such unparalleled channeling of U.S...
...Coffee prices plummeted in 1978, and the following year oil prices again jumped sharply...
...This period was also marked by intensive efforts to incorporate industrialists into the new export schemes...
...W ERE IT NOT FOR U.S...
...Based on "Costa Rica: Key Economic Indicators," U.S...
...government," Monge pointed Caribbean Basin Initiative was disbursed in 1983...
...A bill incorporating the recommended changes was introduced in the legislature in August 1983, but by the end of the year when no action had been taken, AID and the IMF began threatening to delay the promised monies...
...SUPPORT, COSTA Rica would make no debt payments nor reach new agreements with foreign lenders...
...Centro de Estudios Para la Acci6n Social (CEPAS), "La politica de reactivaci6n econ6mica," Costa Rica: Balance de la Situacidn No.8 (June 1984), p. 8 . 20...
...The law also pleased industrialists, who were favored by provisions for taxfree imports of raw materials and components to be used in export industries...
...NOVEMBER/DECEMBER 1985 45SHADOW PLAY Duty-free exports to the United States under the CBI totalled $33.9 million, but three-quarters of this was beef, one of Costa Rica's four main traditional exports...
...The 1979 insurrection in Nicaragua interrupted overland traffic, slowed commerce with the rest of the Common Market and triggered capital flight...
...Many assistance programs primarily benefitted middle-income groups and tended to bypass the poorest 20% of the population...
...It also made clear that it was holding up a $23 million disbursement of a desperately needed $70 million loan until the controversial currency and banking reforms were passed...
...Tax breaks and inexpensive electric power provided incentives for transnational corporations and local industrialists who began to produce consumer goods for the domestic and regional market...
...ESF payments assure a flow of credit to the private sector...
...But he promises more of the austerity programs that have, in effect, begun to dismantle the very institutions which the PLN constructed...
...It was easy to ignore disquieting signs of stagnation and impending crisis...
...The U.S...
...2. For example, Richard Walton, "Corrupting a Country...
...AID was in a position to offer decisive support to the exporters who backed its policies of free market austerity...
...David Fallas of No military, yet growing militarization ment, sugar and aluminum companies were to be sold to the highest bidder...
...S) 1946-61 1962-79 1980 1981 1982 1983 1984 1985 1986* ECONOMIC ASSISTANCE 1. AIDand predecessors 20.10 136.80 13.60 11.50 11.50 28.47 22.72 16.75 loans 10.90 107.80 12.00 10.00 9.70 20.20 17.10 5.20 grants 9.20 29.00 1.60 1.50 1.80 8.27 5.62 11.55 2. P.L...
...Peace Corps personnel have been increased from 145 to 200 in response to Kissinger Commission recommendations...
...One placed limits on government spending...
...8 The country was already tense...
...Alarmed political analysts pointed to the sudden impoverishment of the population and minor outbreaks of violence as destabilizing signs...
...Although the Organization of American States refused to assign responsibility for the killings to either Sandinistas or contras, the conservative news media have largely succeeded in building a consensus around their assertion that revolutionary Nicaragua poses a major threat to Costa Rica...
...In an effort to finance a program of nationwide infant care centers, the legislature passed a 1% tax on exports and dollar remittances abroad...
...Of the dozen companies drawn to Costa Rica by the CBI as of June 1985 four planned to start or expand tropical fern and flower production...
...In January 1985, the Chamber of Industries issued a call for a "national pact to initiate an ordered, gradual reorientation of our economy which would provide sufficient backing for redirecting industrial production" beyond domestic and Central American markets.23 This declaration marked the beginning of a political convergence between the previously disparate industrial and AID-backed agro-export interests...
...A new letter of intent was signed with the IMF in March 1984...
...Eduardo Lizano, "Los modelos econ6micos: sus alternativas," in Oscar Barahona et...
...Foreign investments were to be repatriated in dollars (rather than at the "official" rate of 20 colones to the dollar) and foreign loans disbursed in colones directly to private financial institutions, bypassing the Central Bank...
...According to Reagan Administration reasoning, salvation lies in the open access to the U.S...
...Little is now said, for example, about the consequences for Costa Ricans' wellbeing of a development model that conceives of the state largely as a "facilitator of the action of the private sector," to use the words of the Chamber of Industries...
...In 1979 PLN economist Eduardo Lizano, now director of the Central Bank, explained why Costa Rica lacked the conditions to become a Taiwan or a Hong Kong...
...Others-particularly industrialists-had benefitted from the protectionist policies of the Central American Common Market and the high value of the col6n, which made it easy to acquire the dollars needed to import machinery and inputs...
...La Nacidn, January 13, 1985...
...Although committed to deepening Calder6n's social reforms, Figueres outlawed the Communist Party and suppressed the union movement...
...8 Yet Monge was forced to bite the austerity bullet...
...PLN and leftist deputies were proving hard to convince...
...Accustomed since the early 1960s to preferred access to credit and high protective tariffs, industrialists were reluctant to redirect production to international markets...
...Located on the Central American isthmus between Nicaragua and Panama, Costa Rica's strategic importance goes beyond its role as contra base and neighbor to the Panama Canal...
...Now it has been saved from collapse by massive infusions of U.S...
...Quoted in CEPAS, "Nuevas propuestas," p. 2. 32...
...The social democratic Junta which ruled for 18 months in the aftermath of the 1948 civil war sought to diversify and industrialize Costa Rica's coffee- and banana-based economy.' In 1950, coffee and bananas accounted for more than 40% of GDP and 90% of export earnings, leaving the country extremely vulnerable to volatile market conditions that generated brusque variations in income, employment and government revenues...
...While the conditions posed by AID, the IMF and the World Bank have often been harsh, there has also been a tendency to soften terms at certain crucial junctures, usually as a result of political considerations...
...political influence has accompanied Costa Rica's increased economic dependence...
...Source: United Nations Economic Commission on Latin America...
...The state took over the country's oil refinery in 1973...
...As employers, some were hurt by the new labor code...
...trade embargo on Cuba, it began to export significant amounts of sugar...
...9 The sudden deterioration of 1980-1981 was in part the result of several immediate circumstances...
...The American Institute for Free Labor Development (AIFLD) expects to more than double the number of peasants in its affiliates by 1987 and notes that it "provides production credit and political and technical education courses to the member small farmers...
...By 1979 the industrial sector was generating one-fifth of GDP and employing 16% of the workforce...
...When a new $55 million IMF stand-by agreement was signed in March 1985, Costa Rica had gained a few small concessions...
...Part of this was due to wage hikes and lessened unemployment, allowing private consumption to rise...
...Calder6n counts on the popularity of his father and namesake, the populist president who founded the social security system in the early 1940s...
...LARR-MCA, December 2, 1983...
...One result of the consolidation of an elite consensus around export-oriented growth is that certain fundamental questions are now addressed only at the margins of political debate...
...3. On the 1948 civil war, see Manuel Rojas, Lucha social y guerra civil en Costa Rica (San Jos6: Editorial Porvenir, 1979...
...A number of the institutions required to make these "contributions" were established pillars of the social welfare state, such as the Social Aid Institute (IMAS), the San Jos6 Social Protection Board and the three main nationalized banks...
...The government deficit, for example, stood at 2.5% of GDP rather than the target of 2...
...Like U.S...
...Meanwhile, domestic producers were not finding it any easier to obtain credit...
...In keeping with its professed neutrality in Central American conflicts, Costa Rica refused to participate in several U.S...
...Table 2 U.S...
...Costa Rica alone could not take such steps without jeopardizing its relations with regional trading partners...
...Others noted that the United States did not want to be beaten out by the European Economic Community, which in an October meeting in San Jos6 offered the Central American countries a sizeable assistance package...
...But the process suffered from critical weaknesses...
...Little is left to make the nation's industries competitive with East Asia or lower wage areas of the Caribbean Basin...
...By subsidizing critical imports from the United States, resources are freed up for debt servicing...
...Four decades after the social security system was established in 1941, 76% of the population enjoyed free health care and hospitalization...
...Inflation approached 100%, the currency devaluation since late 1980 reached 450%, unemployment and underemployment soared and there was negative growth (see Table 1...
...The U.S...
...Playing the drama to the hilt, he telephoned Reagan from Brussels...
...La Nacidn, December 20, 1983...
...The agreement called for prompt signing of the World Bank package, negotiation of an additional $75 million loan from private banks and payment of $20 million due to the Paris Club, the main group of Western creditor governments...
...AID and the World Bank stepped in and urged the adoption of less stringent conditions...
...and farm loan and insurance rates raised...
...The accumulation of problems relating to the country's inefficient and import-dependent industry was also reaching a critical point...
...2 On August 19 the banking and currency reforms were approved...
...The goal is to create export-oriented, internationally competitive economies, unprotected from world market forces by tariff barriers...
...In 1982, the first year of the ESF program, REPORT ON THE AMERICAS 40Costa Rica received $20 million, only $5 million of cally, with a $160 million grant in 1985 (see Table 2...
...aid and special treatment from international lending institutions...
...In 1978, faced with an expanding public sector deficit, the government began to absorb a growing share of national banking system credit and to print money in order to meet its debts...
...10 (1984), p.63...
...The Central American Common Market (CACM), which Costa Rica joined in 1963, encouraged free trade among the five members which were protected by high regional tariffs...
...assistance after Israel...
...government tripled the number of scholarships for Costa Ricans attending U.S...
...Finally allowed to float in late 1980, the col6n plunged suddenly and inflation rose immediately...
...By late August, Costa Rica was making neither interest nor principal payments and the IMF accord was suspended...
...32 Costa Rica's extreme dependency and the power void of the coming months may also have critical implications for foreign relations...
...NOVEMBER/DECEMBER 1985 41Reptona Oh 4 Americ SHADOW PLAY can country that does not have anti-U.S...
...I explained the urgent need for AID funds and assured him that the requested modifications will be approved eventually, but that these things often take a lot of time...
...Economic Commission for Latin America, industrialization would improve the trade balance by creating jobs and providing substitutes for previously imported products...
...We never had any problems with Marines, a canal [or] aggressions by transnationals...
...which was in the form of a grant.* Total U.S...
...WHEN COSTA RICANS GO TO THE POLLS in February, they will choose between two main candidates, both advocates of the new economic model...
...In February, the assembly approved a number of tax breaks to exporters of non-traditional products and significantly increased various domestic taxes...
...Such a transformation of the industrial sector remains a weak point in U.S...
...Two bond series were issued, one at fluctuating interest rates...
...Additional ironies emerged shortly after the assembly gave in to IMF and AID pressure...
...By June Monge was desperate, travelling to Europe in search of more aid...
...Implementing export-oriented growth in Costa Rica has required aggressive efforts to change the country's institutions and to reach a new elite consensus...
...Only when a bill was introduced in the assembly substituting a tax on imports for that on exports did AID re-open the spigot...
...The 6% growth rate achieved in 1984 was largely based on revived domestic demand...
...Our relations with the IMF have been very difficult...
...The IMF ultimatum gained Costa Rica support from unlikely quarters...
...N DECEMBER 1982, COSTA RICA SIGNED A $100 million stand-by accord with the IMF and agreements with AID and the Inter-American Development Bank (IDB...
...Many observers suggested that AID wanted to play savior, rescuing Costa Rica from the unpopular IMF...
...Mesoamerica, August 1984...
...S INCE MID-1983, ADDITIONAL PROBLEMS had been complicating Costa Rica's relations with AID and multilateral lenders...
...During the uninterrupted succession of elected administrations which held office after 1949, opposition governments alternated with governments led by the social democratic National Liberation Party (PLN).* But neither group touched what were fundamental changes in the Costa Rican state-nationalized banking and the abolition of the Army...
...Some critics suggested that the lenders' demands reflected political, rather than economic displeasure...
...Nine of the companies were put on the market in October, even though the legislature had not approved the de-nationalization...
...Ambassador Curtin Winsor remarked that it had been necessary to keep this quiet in order to give Monge "the leverage to do what he knew had to be done...
...Central America Report (Guatemala City), August 30, 1985...
...aid have had an immediate, perceptible effect, permitting temporary relief from the debt crisis not possible in the larger Latin American countries...
...Thus U.S...
...Even its anti-militarist tradition and official neutrality in Central American conflicts-while constraining U.S...
...In recent years, U.S...
...Critics viewed these stipulations as an attack on the nationalized banking system...
...T HE 1948 CIVIL WAR BEGAN WITH AN UPrising led by Figueres...
...Both wages and the "social wage," or benefits, must be drastically reduced...
...Thus Costa Rica's anti-Nicaragua declarations are likely to be taken more seriously in world forums than those from El Salvador or Honduras...
...In Costa Rica it is not possible to count on the same circumstances...
...Carazo charged that IMF demands could lead "to a social calamity of intolerable magnitude...
...In June AID warned that $140 million in ESF monies would be withdrawn if the assembly approved a bill giving cooperatives preference in purchasing CODESA subsidiaries and limiting saleable shares to 40...
...The Costa Rican government's budget was $502.2 million in 1983, $586.1 million in 1984 and is projected at $565.4 million this year...
...The policies of the Social Christian Unity Administration of President Rodrigo Carazo (1978-1982) did not help the situation...
...assistance to Costa Rica remained at relatively modest levels until 1981, totalling less than $200 million in the 18 years between 1962-1979 (see Table 2...
...Lame-duck administrations seldom have much authority, but in Monge's case, the power vacuum has been exacerbated by various corruption scandals and inept political maneuvering...
...T HE REAL "BOTTOM OF THE BARREL" came in 1982...
...In 1982, however, AID began to supply Costa Rica with "economic support funds" (ESF), under a new program of loans and grants of which the "primary objective . . . is to support U.S...
...The banks, meanwhile, did their best to play down the news of Costa Rica's insolvency, fearful that it might serve as an example to the hemisphere's big debtors such as Brazil and Mexico...
...The roots of the Costa Rican welfare state go back to the 1940s when the populist government of Rafael Angel Calder6n Guardia instituted an obligatory social security system, covering illness, disability, maternity, unemployment and old-age, and a progressive labor code, guaranteeing the right to form unions, to collective bargaining and to an eight-hour day...
...Gaining the assembly's approval demanded extreme measures...
...Thus the debate over which social groups and economic sectors should bear the costs of reactivating the economy was largely decided by selectively channeling massive amounts of foreign aid and reorganizing the state apparatus at the behest of AID advisers...
...Arias, nominated over the opposition of Jos6 Figueres and the PLN's "old guard," suggests that he is heir to the PLN's social democratic traditions...
...If Costa Rica were to adopt this policy, something would have to happen, for example, in Nicaragua, in order for the United States to give it a similar treatment to that of Hong Kong, Taiwan and South Korea...
...But according to two key objective indicators-the ratio of foreign debt to exports and of foreign debt to GDP-Costa Rica was (and still is) among the Latin American nations least able to meet payments and remain afloat...
...Mylena Vega, "La recomposici6n del bloque en el poder en Costa Rica, la politica norteamericana y el Fondo Monetario Internacional (1982-1984)," Anuario de Estudios Centroamericanos, Vol...
...This meant that Costa Rica had to submit a new letter of intent and begin yet another round of talks...
...Growing U.S...
...The Ministry of Education, for example, received 28% of the government budget in 1980 and only 17.6% in 1984.29 Debt payments absorbed about half of export earnings in 1984, contributing to a continuing shortage of resources for development...
...Arguing that this step discouraged exporters, in mid-November AID suspended a $20 million disbursement and the IMF followed suit by holding up a promised $60 million...
...Monge and many of his supporters in the PLN had long recognized that most of the companies REPORT ON THE AMERICAS 44would probably have to be sold to the private sector if IMF fiscal goals were to be met...
...But if the nine comandantes in Managua have proven to be Costa Rica's indirect short-term salvation, the growing flow of aid clearly has longer term costs...
...480 Food for Peace 1.10 18.30 0.40 1.80 19.10 28.20 22.50 21.40 loans - - - - 18.00 28.00 22.50 21.40 grants 1.10 18,30 0.40 1.80 1.10 0.20 - - 3. Economic Support Funds - - - - 20.00 155.74 130.00 160.00 loans - - - - 15.00 118.00 35.00 - grants - 5.00 37.74 95.00 160.00 4. Other** 31.00 43.80 2.00 2.00 1.10 1.70 3.70 loans - 11.80 - - - - - - grants 31.00 32.00 2.00 2.00 1.10 1.70 3.70 - Total Economic Assistance 52.20 198.90 16.00 15.30 51.70 214.10 178,92 198.15 187.00 loans 10,90 119.60 12.00 10.00 42.70 166.20 74.60 26.60 grants 42.60 79.30 4.00 5.30 9.00 47.90 104.32 171.55 SECURITY ASSISTANCE total 0.10 6.90 - 0,03 2.05 2.64 9.15 9.20 2.73t loans 0.10 5.00 -- - - grants - 1.90 - 0.03 2.05 2.64 9.15 9.20 2.73 *Requested "**Peace Corps, Narcotics Program and others...
...The Tico Times (San Jos6), 1984 Review...
...A significant portion of the upper class had long favored IMF-style economic liberalism, hoping their products would be more competitive on foreign markets...
...As such, continuing AID grants provide the edge which allows Costa Rica to meet stringent IMF and World Bank conditions while retaining politically acceptable living standards...
...Central America Report, October 18, 1985...
...22 B Y SEPTEMBER IT BECAME CLEAR THAT the conditions specified in the March IMF agreement were not being met...
...This meant that imports and trips abroad were artificially cheap and that Costa Rica's exports were overvalued and expensive by regional standards...
...Disagreements over development models were played out in debates over issues such as devaluation of the col6n...
...Another required several autonomous public institutions to finance various government programs, as well as the deficit of the executive branch...
...During World War II, Calder6n confiscated extensive German-owned coffee, sugar and banking properties...
...In the short run, garment and assembly plants located in coastal free-trade zones are seen as a partial solution to the crisis...
...From 1961 to 1973, GDP grew at an impressive annual rate of 7...
...Calder6n then entered an unstable alliance with the Church and the Communist Party, which supported the government's labor laws...
...8. Mesoamerica (San Jos6), January 1982...
...A recovery began slowly in 1983 and quickened in 1984...
...By the early 1980s, the average life expectancy of 73.1 years and the infant mortality rate of 18.8 per thousand were unmatched by any other country in Latin America except Cuba...
...policy-makers...
...The $4.4 billion debt and still significant state sector absorb a large share of available resources...
...Eugenio Rivera, El Fondo Monetario Internacional y Costa Rica (San Jos6: Departamento Ecumenico de Investigaciones, 1982), p. 155...
...The IMF surprised the Costa Rican government in September 1985 with a series of harsh new demands, including orders to slash the government budget by an additional $19.2 million in six months, to keep 1986 salary increases below the inflation rate and to make one drastic devaluation instead of a series of mini-devaluations...
...24 N 1985 AID INTENSIFIED ITS EFFORT TO DISmantle the Costa Rican public sector, setting its sights on CODESA, the vast state-owned company which had subsidiaries in various areas of the economy and an estimated 2,000 to 6,000 employees...
...The fiesta is over," a leading Costa Rican economist told The New York Times...
...Costa Rica was seemingly riding high, and remarkable gains in social welfare were made during this period...
...Central America policy...
...Because the Costa Rican economy is small-with an annual GDP of slightly over $2 billion-relatively limited injections of U.S...
...By October 1985, Monge was able to claim that he had saved Costa Rica's peace and liberty...
...This in turn assured the economic and political ascendence of those linked to the export-oriented growth model...
...creased rapidly and a sudden 50% devaluation of the col6n made most Costa Ricans feel the pinch...
...al., Los problemas econdmicos del desarrollo en Costa Rica (San Jose: Editorial UNED, 1980), p. 125...
...After AID's intervention, Monge praised the "understanding attitude of the U.S...
...plans for regional maneuvers-have been useful in projecting the image of an unarmed, non-belligerant democracy threatened by "expansionist" Nicaragua...
...In essence, the scheme involved borrowing from Peter to pay Paul...
...AID, Congressional Presentation, Fiscal Year 1985...
...5 B UT U.S...
...Key fuctionaries have caused the president embarrassment by unilaterally making policy decisions...
...In the rush to reap the benefits of competition, once basic assumptions about Costa Rican society have been obscured...
...According to the U.N...
...education and public employment slashed...
...Many had gotten their start only because the nationalized banking system had sought to diversify the economy, giving priority to activities other than coffee and bananas...
...In the legislative area, the 1982 AID accord specified that disbursements after February 1983 would be conditioned on modifications of currency and banking regulations...
...These countries had great access to North American capital and, moreover, access to the U.S...
...Most of the 18 CODESA companies were notoriously inefficient, consistently ran large losses and absorbed a disproportionate share of bank credit...
...Hong Kong, Taiwan and South Korea are directly on the frontier of the communist world and there was a very strong political interest in developing them...
...Opposition deputies in the assembly conditioned their support for ratification of an $80 million World Bank loan on the approval of two laws...
...Many were sympathetic to the small group of social democrats led by Jos6 Figueres, which by 1948 formed an alliance of convenience with the traditional oligarchy aimed at overthrowing Picado...
...Overseas Loans and Grants and Assistance from International Organizations July 1, 1945- September 30, 1982...
...AFP (Paris), July 15, 1985 in FBIS-LAM, July 17, 1985...
...AID and the IMF were not proving easier to please...
...out in 1983 that Costa Rica "is the only Latin AmeriTable I Costa Rica: Basic Economic Indicators 1978 1979 1980 1981 1982 1983 1984* Gross domestic product (GDP) (in 1970 millions of U.S.$) 2099.0 2202.0 2220.0 2170.0 2012.0 2059.0 2183.0 GDP (growth rate) 6.3 4.9 0.8 -2.3 -7.3 2.3 6.0 GDP per capita (in 1970 U.S.$) 977.0 995.0 974.0 927.0 836.0 834.0 861.0 GDP per capita (growthrate) 3.0 1,9 -21 -4.9 -9.8 -0.2 3.2 Unemploymentrate (%) 4.6 4.1 5.3 8.3 8.5 7.9 6.4 Inflation (consumer prices) 6.0 9.2 18.1 37.0 90.1 32.6 12.0 Trade balance (millionsof U.S.$) -226.0 -421.0 -459.0 -127.0 73.0 - 16.0 -730 Total foreign debt (millions of U.S.$) 1870.0 2233.0 3183.0 3360.0 3497.0 3848.0 4400.0 *Preliminary figures...
...Increasingly, advocates of this model of development articulate the vision of a Central American Taiwan or South Korea...
...The government agreed to reduce inflation from 17% to 12% and to freeze credit to the public sector, a reduction of 12% or more in real terms...
...Given the development model's assumptions, the state is increasingly incapable of addressing key social problems...
...They warned that Costa Rica might follow the route of Uruguay, another social welfare state whose democratic political system was replaced with a military dictatorship in 1973...
...market...
...The accord involved a slightly less drastic reduction of the deficit to 1.5% of GDP and less painful, gradual mini-devaluations of the col6n...
...8 But the recovery the United States has engineered through massive cash injections is still beset by problems...
...Statistical Abstract of Latin America, 1984 (Santiago: U.N...
...The Tico Times (San Jos6), June 22, 1984...
...IN AUGUST 1981, A YEAR BEFORE THE "Mexico weekend" which is now widely cited as marking the onset of the current regional debt crisis, Costa Rica became the first Latin American country to cease all payments on its international obligations...
...It also abolished the Army in order to prevent conservative forces from regaining power through a coup d'etat...
...The following month AID, using $70 million appropriated for Costa Rica under the Caribbean Basin Initiative, established the Coalition for Development Initiatives (CINDE), a private lobby which carries out feasibility studies on export promotion...
...Ironically, at least one Costa Rican had glimpsed the future...
...But dire predictions proved unfounded, and a new Administration led by Luis Alberto Monge of the social democratic National Liberation Party (PLN) succeeded the Carazo government in May 1982...
...But March's targets were no longer good enough...
...10 (October 1984-May 1985), p. 2 . 24...
...While these measures did little to reduce the government deficit, they did feed existing tendencies toward stagnation and inflation by increasing the foreign debt...
...Monge again expressed despair about the state of IMF relations...
...aid has equalled roughly one-quarter of export earnings...
...After 1974, the publically owned Costa Rican Development Corporation (CODESA) made major investments in transportation and fertilizer, sugar, aluminum, cotton and cement production...
...During the Administrations of Calder6n Guardia (1940-1944) and his successor Teodoro Picado (19441948), middle-class shopkeepers and urban professionals grew increasingly uneasy...
...Except for occasional reverses like the 1977 coffee price bonanza, the country's terms of trade-the price of exports relative to imports-had been declining for years...
...invasion of the Grenada...
...A network of government and autonomous public institutions was created to administer programs in key areas such as education, health, nutrition, child welfare, housing and retirement pensions...
...Agency for International Development (AID), the International Monetary Fund (IMF) and the World Bank are demanding and receiving significant changes in the institutions which permitted Costa Rica to achieve this progress...
...Economic Commission on Latin America...
...Figures vary on changes in income distribution during the 1970s, with some studies indicating slight improvement and others deterioration...
...3 0 Few of these new CBI-inspired ventures created many jobs...
...In addition, an AID-created trust company was formed in July to purchase the subsidiaries if private bidders were not forthcoming...
...Jos6 Luis Vega, "Decadencia politica y crisis econ6mica en Costa Rica," Cuadernos Centroamericanos de Ciencias Sociales 8 (1982...
...On most issues Arias and Calder6n differ only slightly, producing a rather dull and sterile campaign that pundits have until recently characterized as "Mondale versus Mondale...
...But the multilateral support did not arrive quickly enough...
...Since the 1940s, Costa Rica had managed to create--by developing country standards-an advanced social welfare state that provided Central America's highest living standard...
...Calder6n's PUSC has in general advocated a more rapid liberalization of the economy and strict compliance with lending agency demands for austerity...
...economic assistance reached $214 million In subsequent years, both total ESF assistance and in 1983--equivalent to 10% of the country's GDPthe proportion donated outright has grown dramati- and has remained at nearly that level...
...The bank's principal condition was a reduction in Central American tariffs and customs duties, intended to lessen the protection provided industry and make it more competitive in world markets...
...universities, now at 500 per year...
...But ferns and flowers do not constitute a modern industrial sector...
...Gradually, new markets opened and fresh credits from the nationalized banks helped modify the traditional two-product economy...
...Final negotiations for the World Bank loan, however, lasted until April 1985...
...The government's reform efforts had the blessings of San Josd's progressive archbishop, who saw Calder6n, a devout Catholic, as a break with previous anti-clerical administrations...
...Also Costa Rica's 89% literacy rate was surpassed only by Cuba and the more developed countries of the southern cone, Argentina, Chile and Uruguay.' Despite these impressive advances, poverty was far from eliminated, especially in the countryside...
...Agro-exports, however, continued to be the main source of foreign exchange...
...Identified with the development model which the PLN had sought to implement since the 1950s, members of this group also had links to public-sector industrial enterprises...
...The government tried to maintain existing levels of production and employment through direct investments financed with still more foreign borrowing...
...AID intervention took the form of a major effort to reshape Costa Rica's institutions and, with occasional assists from the IMF, an unprecedented campaign of legislative bullying designed to provide its program with a legal framework...
...Protectionism is on the rise in the developed world, and U.S...
...In 1984, $28 million in AID funds were used to set up the Private Investment Corporation (CPI), whose functions include making loans to export producers, underwriting investments, developing plans to attract foreign capital and servicing new investors...
...Electoral irregularities in that year's presidential elections were the pretext for rebellion, although his social democratic forces and their upper-class allies had been plotting for years against Picado's government...
...Redirecting industry to the world market is a major undertaking requiring immense financial resources...
...generosity is not unlimited...
...They hoped to assign CODESA a reduced role in the economy and to turn at least some enterprises over to the employees in the form of cooperatives, like those that had long been common in the Costa Rican countryside...
...Others were angered by corruption, Picado's new income tax and Communist participation in government...
...is Changing Costa Rica," The Nation, October 5, 1985...
...Without political power, economic recovery could be "short-lived," according to Central Bank director Lizano...
...designs for Costa Rica, and could potentially cause cracks in the fragile domestic consensus...
...Most of the other new enterprises were of a similarly modest scale...
...It also permitted private finance companies to make loans for NOVEMBER/DECEMBER 1985 39SHADOW PLAY the first time since 1949, and removed subsidies that had allowed producers to borrow working capital at low interest rates...
...The deterioration of social services has further exacerbated this trend...
...AID, which had promised $190 million for the year, specified that its assistance depended on the IMF agreement...
...In May the U.S...
...Parallel to 1984's AID and IMF discussions, Costa Rica intensified negotiations with the World Bank for a three-year $300 million structural adjustment loan...
...2 7 Monge thanked IMF Director Jacques de Larosiere in a letter, promising that in Costa Rica he "would find an attitude of collective responsibility about facing our obligations...
...We have distanced ourselves from the abyss in which our country found itself in 1982," he declared...
...Costa Rica hoped to repay Mexico with AID funds in April, but debate on the currency and banking measures dragged on...
...Reagan told his advisers to get hold of AID in Costa Rica and turn over the $70 million.' AID, however, had not altered its bargaining position...
...These actions cost him support among the coffee growers who elected him in 1940 without suspecting his reformist NOVEMBER/DECEMBER 1985 37RepoE4 on 4h Americs SHADOW PLAY inclinations...
...The new rules of the game iniplied a reduction in these historic privileges...
...ROWTH SLOWED AFTER THE OIL PRICE shocks of 1973...
...External constraints on the model may also thwart future growth...
...economic, political and security interests and to advance foreign policy objectives...
...Non-traditional exports of the type pushed by AID grew dramatically in 1984, but at only $8.1 million, their overall contribution to earnings was negligible...
...Quoted in CEPAS, "Nuevas propuestas para la economia de exportaci6n," Costa Rica: Balance de la Situacidn, No...
...PLN legislator Jorge Luis Villanueva declared that this unprecedented sequestering of the legislature for a marathon 20-hour debate constituted "an abduction of the parliamentarians' will...
...Some of the public sector monies were to be used for higher education and retirement programs run by the social security system...
...When several large debt payments were due that same month, Monge sought an eleventh-hour bailout from Mexico, which came through with a $50 million short-term loan...
...At the same time, faced with a critical shortage of foreign exchange, the government informed 139 of its creditor banks that in August and September it would make interest payments only...
...aid has been tied to the same kind of conditionality posed by the IMF...
...In April, Costa Rica became the first nation to be granted a multi-year rescheduling by the Paris Club, an agreement which stretched out $150 million over 10 years with five years grace...
...7 But the combined agro-export and import substitution industrialization development models, contributed to a greater concentration of wealth and land...
...Source: U.S...
...By the early 1980s, the world economy was in recession and markets for Costa Rican exports were few...
Vol. 19 • November 1985 • No. 6
